CL T CLO Series 1

Analysts:
Jerry Fang, Taipei
Clementine Kiang, Taipei
Diane Lam, CFA, Hong Kong

This report does not constitute a recommendation to buy, hold, or sell securities.

Rating Details

New Ratings

Profile
Issuer: CL T CLO Series 1
Closing Date: Sept. 29^th, 2003
Final Legal Maturity Date: Sept. 29^th, 2009
Originator/Servicer: Credit Lyonnais, Taipei Branch
Trustee/Backup Servicer: Grand Commercial Bank
Account Bank: Credit Lyonnais, Taipei Branch
Arranger: Credit Lyonnais, Taipei Branch

Rationale
The four tranches of certificates issued by CL T CLO Series 1 (SPT) are backed by a portfolio of 17 Taiwan dollar denominated corporate bank loans originated by Credit Lyonnais, Taipei Branch, especially for this transaction. This is second collateralized loan obligation (CLO) in Taiwan, and the first primary CLO and public offering of any securitization in Taiwan.

The ratings address the full and timely payment of interest and full repayment of principal on or before the final legal maturity date in 2009. The final ratings were assigned on the closing date after a satisfactory review of all documents, as well as legal, tax opinions and tax rulings.

The credit ratings assigned to the classes of fixed rate certificates issued by SPT reflect:

• The credit quality of the portfolio;
• The level of credit support for the different classes of certificate provided by subordinated certificates and equity;
• The establishment of a liquidity reserve;
• Sufficient cash flow to meet timely payment of interest and ultimate repayment of principal by the Final Legal Maturity Date for each class of certificate holders under various stress scenarios;
• The experience of the servicer in managing and collecting corporate loans in Taiwan;
• The ratings of the supporting parties such as bank account providers; and
• The bankruptcy remoteness of the issuer.

Strengths, Concerns and Mitigating Factors:

Strengths:

• The transaction structure eliminates basis risk and commingling risk since the interest rate on the loans and on the certificates are fixed rates, and the borrowers are directed to remit to the SPT bank account directly;
• Each loan will have a blank promissory note from the borrower;

• The transaction's sequential payment structure ensures that the most senior rated certificates will be repaid in full before any monies may be used to reduce the junior classes of certificates;
• In stressing the cashflows, no recoveries have been assumed on any defaulted loans, but should there be recoveries, these additional monies will be used to pay the certificate holders;
• Although the last maturing loan matures in five years, the final legal maturity of the certificates is in six years providing a tail period of 12 months;
• A liquidity reserve and is replenished from excess cash flows; and
• Non-amortizing credit support results in increasing amounts of credit support as the more senior tranches pay down.

Concerns:

• Small portfolio of obligors results in less diversification and in particular, the airline industry and automotive industry account for 11% and 9% exposure by dollar value;
• The loans pay interest annually and the principal is repaid as a bullet either three or five years from closing

Mitigating Factors:

• Standard & Poor's CDO Evaluator assesses the probability of default on individual loan basis based on each loan's characteristic (i.e. size of the exposure, the industry and the correlations of the industry).
• The cash flow testing sequences ensures that even with expected lumpy cash flows and assumed loan defaults, the certificates can be repaid. The servicer will implement procedures to ensure monies are collected in a timely manner.

Originator/Servicer/Back-Up Servicer
Credit Lyonnais, Taipei Branch, holds a banking license in Taiwan and is a commercial lender to corporates in Taiwan. The Taipei branch has been operational for nearly 20 years. On June 4^th, 2003, Standard & Poor's Ratings Services upgraded its ratings on Credit Lyonnais to AA-/stable/A-1+.

The back-up servicer, Grand Commercial Bank (GCB; rated twBBB/Positive /twA-3 by Taiwan Ratings Corp. and BB/Positive/B by Standard & Poor's as of July 10, 2002). GCB is licensed as a commercial bank in accordance with the Banking Law of Taiwan. TRC and Standard & Poor's affirmed their long-term and short-term counterparty credit ratings on GCB, but revised the outlook to positive from negative in July 2003, following an announcement by Chinatrust Financial Holding Co. that it plans to acquire GCB for about NT$19.9 billion. The revision of the outlook on the long-term rating on GCB reflects the likelihood that GCB's financial profile will improve as a result of its proposed incorporation into Chinatrust Commercial Bank, the CTFHC subsidiary.

Transaction Overview

This transaction is a bank loan primary CLO arranged by Credit Lyonnais. The Taiwan dollar denominated unsecured loans will be extended to 17 Taiwan corporates in different industries. At closing, Credit Lyonnais entrusted this loan portfolio to SPT according to the Financial Asset Securitization Law. SPT was recently created and GCB is the trustee. The trustee issued four tranches of rated certificates ¡V Senior [twAA], M-1 [twA], M-2 [twBBB] and M-3 [twBBB-]. The residual beneficiary is unrated. The residual beneficiary certificates would be the first loss in this transaction if losses are incurred.

The credit support for the differing tranches is derived from the estimated probable default from the obligors and the sufficiency of the cash flows from the obligors to repay timely interest and principal to the certificates by no later than the final legal maturity.

Unless previously redeemed by the trustee, the certificates will be repaid by no later than the final legal maturity date of Sep. 29^th, 2009, 12 months after the last loan to mature in the portfolio matures. The final legal maturity provides a tail period of [12] months to ensure that any back ended losses on the portfolio can be liquidated, and the recovery proceeds from such types of defaulted loans may be available to repay the certificates.

The portfolio is initially being serviced by Credit Lyonnais and the trustee is the back-up servicer, GCB.

The Loan Portfolio
The collateral consists of a portfolio of loans to 17 Taiwan corporates, for an aggregate amount of NT$8.8 billion.

The loans are fully drawn down at closing. Each loan is an unsecured senior obligation of the respective borrower. The loan size ranges from NT$300 million to NT$1 billion. Each loan is a bullet loan, with maturities ranging from three years or five years. Interest on the loans is paid annually.

Credit and Cashflow Analysis
Since most of the obligors do not have published ratings, Taiwan Ratings performed credit assessments on all of the unrated obligors to determine their credit quality. The expected default at different rating categories was determined using Standard & Poor's CDO Evaluator. Using Monte-Carlo methodology, the CDO Evaluator factors the probability of individual loan default, obligor concentration and industry correlations and computes the expected level of default that a CDO tranche would be able to withstand at a given rating level.

To verify that full and timely payment of interest and ultimate repayment of principal on the senior certificates can be met, Taiwan Ratings performed a cash flow analysis and subjected the transaction to a variety of stress scenarios.

Structural Analysis
Interest Rate Risk/Basis Risk.
There is no interest rate risk in this deal, because the loans are fixed rate loans. The certificates are also paid at a fixed rate.

Prepayment Risk.
According to the terms of the loans, the borrowers are not given the option to prepay. However, should a loan be prepaid as a result of a breach of covenant, it could result in negative carry for the transaction because the proceeds when invested in cash or cash like instruments may not earn sufficient returns to meet the issuer's liabilities. In the event of prepayment, the prepayment amounts will be released to certificate holders within 3 days from the date of receipt of such monies.

Commingling Risk.
There is no commingling risk in this transaction since the borrowers are required to remit directly to SPT's account.

Set-off Risk.
As Credit Lyonnais is a deposit taking institution, many of the obligors are likely to have deposits with Credit Lyonnais, creating a setoff risk against their relevant bank loans. Each of the loan documents contains an explicit waiver by the borrowers of their setoff right. A legal opinion will confirm that such contractual waiver of rights is legal, binding and enforceable, and borrowers may not exercise setoff rights.

Servicer Transition Risk.
Servicer transition risk will be sized to meet liquidity needs of the transaction. Additionally, to cover incidental expenses, the cash flows simulations assume additional extraordinary expenses are expended in each period. The servicer may not resign within 90 days prior to any payment date. This is to reduce further disruptions on the transaction, given the nature of the concentrated repayment profile. Additionally, in the event of a servicer termination, the trustee will act as the back-up servicer.

Legal and Tax Analysis
The transaction is structured in accordance with the Financial Asset Securitization Law of Taiwan. Article 26 of the Financial Asset Securitization Law stipulates that if a resolution of a beneficiaries meeting impairs the rights of a certain class of beneficiaries, the resolution must be endorsed by a meeting of the class of beneficiaries affected by the resolution. Restrictions on holders of senior certificates or limitations on their flexibility may result in adverse consequences in the event of an enforcement event. However, in August 2003, the Enforcement Rule became effective. The Enforcement Rule states that the rights of the beneficiaries of a certain class referred to in Article 26 of the Financial Asset Securitization Law are limited to the rights which such beneficiaries are entitled to and are clearly outlined in the special purpose trust agreement. The trust agreement of this transaction already anticipates that if the applicable laws are amended, then the classes of creditors will be treated in accordance with the amended law. Consequently, the possible adverse consequence in the event of an enforcement event has been eliminated from this transaction. The law requires the trustee to withhold 6% on amounts paid to certificate holders for tax purposes. Therefore, unless a specific ruling is obtained, certificate holders will receive their coupon, net of the required taxes.

Prior to assigning the final ratings and the closing of the transaction, Taiwan Ratings Corporation received satisfactory legal, tax opinions and tax rulings.