Industrial Bank of Taiwan Corporate Loan Securitization Special Purpose Trust

Analysts:
Clementine Kiang, Taipei (8862) 2368-8277; Jerry Fang, Taipei (8862) 2368-8277; Kyson Ho, Hong Kong (852) 2533-3528;Diane Lam, CFA, Hong Kong (852) 2533-3522

Rating Details
Rating: twA

Profile
Issuer: Land Bank of Taiwan as trustee for the Industrial Bank of Taiwan Corporate Loan Securitization Special Purpose Trust

Issue: Taiwan dollar (NT$) 2.766 billion senior beneficial certificates due 2011

Amount: NT$2.766 billion

Date Closed: Feb. 24, 2003

Originator/Servicer: Industrial Bank of Taiwan

Trustee/Backup Servicer: Land Bank of Taiwan

Interest Rate Swap Counterparty: Societe Generale

Account Bank: Chinatrust Commercial Bank

Arranger: Societe Generale

Rationale
Taiwan Ratings Corp. assigned its 'twA' rating to NT$2.766 billion in senior beneficial certificates due 2011 to be issued by Land Bank of Taiwan as trustee for the Industrial Bank of Taiwan Corporate Loan Securitization Special Purpose Trust. The senior certificates are backed by a static pool of corporate loans (the loan portfolio) originated by Industrial Bank of Taiwan (IBT).

The rating addresses the full and timely payment of interest and full payment of principal on or before the senior certificates' legal maturity date in 2011.

The rating is based on:

• The credit quality of the loan portfolio;
  
• Sufficient credit support provided by overcollateralization to cover obligor default and commingling risks;
  
• The establishment of cash reserves to provide liquidity support to the transaction and to mitigate both potential obligor setoff risk and servicer transition risk;
  
• An interest rate swap agreement entered into with Societe Generale to hedge any interest rate mismatch between the fixed-rate senior certificates and the mostly floating-rate loan portfolio;
  
• A robust cash flow structure - timely payment of interest and full payment of principal on the senior certificates will be possible, even under stressed cashflow scenarios;
  
• Servicing by IBT, with Land Bank of Taiwan appointed as backup servicer; and
  
• The transaction's sound legal and tax structure.

This transaction represents the first securitization of any asset type in Taiwan.

Originator
IBT was officially set up as an industrial bank in July 1999. Taiwan Ratings affirmed its 'twBBB-' long-term counterparty credit rating and 'twA-3' short-term ratings to IBT in October 2002. The outlook on the long-term rating is stable.

Transaction Overview

IBT will transferred the loan portfolio to the Industrial Bank of Taiwan Corporate Loan Securitization Special Purpose Trust (SPT), which was created with Land Bank of Taiwan as trustee. The SPT then issued senior and subordinated certificates. The senior certificates were sold to investors and the proceeds ultimately paid to IBT, and the subordinated certificates were issued to IBT as well in consideration for the entrustment of the loan portfolio. The SPT has also entered into an interest rate swap with Societe Generale to hedge any interest rate mismatch between the loan portfolio and the senior certificates.

Terms of the Senior and Subordinated Certificates
The senior certificates pay monthly interest at a fixed rate of 2.8% p.a. Article 41 of the Financial Asset Securitization Law stipulates that income from trust property, after deduction of costs and necessary expenses, belongs to the beneficiaries. Such net income will be taxed as interest income at the hands of the beneficiaries. The trustee is responsible for withholding tax from interest due to senior certificateholders. As such, interest received by senior certificateholders will be net of the tax deductedin this way. As principal payments on the senior certificates will be made on a pass-through basis every month, investors may be subject to prepayment risk on principal received prior to the legal final maturity of the senior certificates in 2011.

The subordinated certificates do not bear any interest. Principal on the subordinated certificates will only be paid after the senior certificates have been redeemed in full.

The Loan Portfolio
As a static pool transaction, IBT is not entitled to entrust new loans to the SPT or substitute any existing loans after closing. As at the cut-off date, the key attributes of the loan portfolio were as follows:

• Outstanding principal amount of approximately NT$3.59 billion;
  
• 41 loans extended to 23 obligors;
  
• Bilateral or syndicated loans;
  
• Senior unsecured or senior secured loans;
  
• A weighted average loan maturity of 2.2 years.

Largely reflecting the composition of the Taiwan economy, the loan portfolio's underlying obligors are concentrated in a number of industries, including computer storage and peripherals, semiconductors, and compact-discs recordable. Industries with an obligor concentration in excess of 5% of the pool as at the cut-off date are listed below:

Credit and Cashflow Analysis
As most of the obligors are not publicly rated, Taiwan Ratings performed credit assessments on all of the unrated obligors to determine their credit quality.

The results of such credit assessments, obligor and industry concentrations, and loan maturities were then entered into Standard & Poor's CDO Evaluator to determine the default risk of the loan portfolio. Utilizing Monte-Carlo methodology, the CDO Evaluator takes into account the probability of default on each loan, obligor concentration and correlation among obligors from the same industry in the loan portfolio to determine the maximum level of portfolio defaults 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
Commingling risk.
Commingling risk to IBT for bilateral loans in the loan portfolio has been structurally eliminated. Commingling risk to agent banks for syndicated loans in the loan portfolio has been addressed by a combination of structural safeguards and overcollateralization.

Obligor setoff risk.
As a deposit-taking institution, obligors may have deposits with IBT, creating potential rights of setoff against the bank. These set off risks have been mitigated by the sending of notices to obligors (informing them of the transfer of their loans to the trust) thus preventing any future rights to setoff from accruing, and through the establishment of additional cash reserves at closing.

Interest rate risk.
The SPT has entered into an interest rate swap arrangement with Societe Generale to hedge any interest rate risk that may arise in the transaction.

Servicing.
IBT acts as the initial servicer for the loan portfolio. Upon the occurrence of certain events, Land Bank of Taiwan will replace IBT as the servicer for the transaction. To provide additional liquidity support to cover possible interruptions in cashflow to the certificates that may occur during a servicer transition, cash reserves were fully funded at closing to meet several months of senior expenses for the transaction.

Legal Analysis
The transaction is structured in accordance with the Financial Asset Securitization Law of Taiwan, which provides for the establishment of the SPT, the transfer of assets from the originator to the SPT, and perfection against obligors and third parties. Taiwan Ratings received satisfactory legal and tax opinions prior to the closing of the transaction.

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. Under the present transaction, beneficiaries are defined as holders of rated senior certificates and unrated subordinated certificates. As such, holders of subordinated certificates have a right to veto any resolution proposed by holders of senior certificates if that resolution is perceived to impair the rights of the holders of subordinated certificates. This contrasts with the comparatively restricted voting rights (if any) of holders of subordinated certificates in other jurisdictions. Restrictions on holders of senior certificates or limitations on their flexibility may result in adverse consequences in the event of an enforcement event or lead to situations in which the rating on the transaction is revised or withdrawn. The attention of investors is drawn to the Risk Disclosure section of the Offering Circular. Taiwan Ratings' 'twA' rating on this transaction addresses only probable default. No collateral or recovery value has been factored into the credit analysis in respect of this transaction.

Taiwan Ratings., Standard & Poor's, and other participants in this transaction have expressed concern about the potential impact of Article 26 of the Financial Asset Securitization Law to the Taiwan regulator. The parties believe that the rights conferred to junior classes of certificate holder could seriously affect investor appetite and the ability of other trusts to issue multiple tranches of certificates. As such, the parties believe that the provisions of Article 26 of the Financial Asset Securitization Law may hinder the development of a securitization market in Taiwan.