Industrial Bank of Taiwan Corporate Loan Securitization Special Purpose Trust - CLO2

Analysts:
Vince Chan CFA, Hong Kong
Diane Lam CFA, Hong Kong
Claire Chang, Taipei
Clementine Kiang, Taipei

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

Rating Details

Profile:

Rationale
The ratings address the timely payment of interest and full payment of principal on or before the senior certificates' legal maturity date in November 2009. The senior beneficial certificates are backed by a static pool of corporate loans (the loan portfolio) originated by Industrial Bank of Taiwan (IBT).

The ratings are based on:
--The credit quality of the loan portfolio;
--The level of credit support for the different classes of senior 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;
--The satisfactory legal and tax opinion and
--The bankruptcy remoteness of the issuer.

Originator
IBT was officially set up as an industrial bank in July 1999. As of the date of the publication of this report, Taiwan Ratings' long-term counterparty credit rating on IBT was 'twBBB-' and its short-term rating on the bank was 'twA-3'. The outlook on the long-term rating is stable.

Transaction Overview
At closing, IBT entrusted an 18-obligor portfolio to Land Bank of Taiwan as the trustee for the SPT. The SPT then issueed two types of certificates, the senior beneficial certificates and the subordinated beneficial certificates. The senior beneficial certificates, consisting of Classes 1-3, were sold to investors and the proceeds will ultimately be paid to IBT. The first two classes were distributed by public offering while Class 3 was privately placed. Classes 4 and 5 are subordinated beneficial certificates that were issued to IBT.

Terms Of The Senior And Subordinated Beneficial Certificates
The certificateholders of Classes 1-4 will receive semiannual fixed-rate interest at different annual interest rates as shown in the rating details. Interest on Class 5 certificates is not stipulated. Class 5 notes are entitled to any residual interest collections. This class will be paid any amount that may remain in interest collections after all senior and junior expenses as well as interest on the first four classes are settled in full.

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. The trustee is responsible for withholding tax from interest due to certificateholders. Consequently, interest received by certificateholders will be net of tax withheld.

Although principal payments will be made on a pass-through basis every 6 months, investors may be subject to prepayment risk on principal received prior to the legal final maturity of 2009 if early amortization event happens. The principal on Class 5 beneficial certificates will only be paid after Classes 1-4 certificates are completely paid off.

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 closing date, the key attributes of the loan portfolio were as follows:
--18 obligors and 18 bilateral loans;
--Senior unsecured;
--Fixed-rate and fixed-term, all 4-year term except one with 2-year term;
--A weighted average life of 2.45 years;
--Newly originated;
--Non-revolving;
--Amortizing payment schedule;
--Set-offs against obligors' deposits with IBT not permitted; and
--Assignment of obligation to third party by obligors not allowed.

Largely reflecting the composition of the Taiwan economy, the loan portfolio is concentrated in a number of obligor industries, such as semiconductors, building and development, and telecommunications. Industries with an obligor concentration in excess of 5% of the pool as of the closing date were as follows:

Credit And Cashflow Analysis
As most of the obligors were not 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 inputted into Standard & Poor's CDO Evaluator to determine the default risk of the loan portfolio. Using Monte-Carlo methodology, the CDO Evaluator took into account the probability of default on each loan, obligor concentration and correlation among obligors from the same industry of the loan portfolio to determine the maximum level of portfolio defaults that a CDO class was able to withstand at a given rating level.

To verify that timely payment of interest and ultimate repayment of principal on the senior beneficial 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.
There is no commingling risk. All obligors are required to remit their payments directly to a special bank account designated for the SPT with Chinatrust Commercial Bank (twAA-/Stable/twA-1).

Obligor set-off risk.
There is no set-off risk by virtue of a specific waiver of the rights of set-off by the obligors, which is supported by legal opinions that such waiver is legal, enforceable and binding under Taiwan laws.

Interest rate risk.
There is no interest rate risk, because the loans and the notes are fixed-rate.

Prepayment risk.
The borrowers do not have the option to prepay. The only situation where the obligors prepay is when payment acceleration occurs. Payment acceleration includes, among other things, a recall of loans as a result of covenant breaches under the terms of loan agreements. Negative carry is partially incorporated in the liquidity reserve. A conservative cashflow model is used to provide an extra buffer against additional negative carry.

Liquidity risk.
The liquidity risk is minimal. By definition, a loan is considered in default when it is one day overdue. Consequently, the cashflow model does not take delinquencies into account. No recovery is assumed in the model either.

Servicing.
IBT will act 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 to cover possible interruptions in cashflow to the certificates that may occur during a servicer transition, a liquidity reserve will be fully funded at closing to meet 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 protection from obligors and third parties. Taiwan Ratings has received satisfactory legal and tax opinions prior to the closing of the transaction.