WPI AR Securitization

Publication date: November 12th , 2004 Analysts : Jerry Fang, Taipei (02) 2368-8277 This report does not constitute a recommendation to buy, hold, or sell securities. NT$2.5 billion ABCP* Notes Senior Certificates Rating Authorized program limit amount Short-term Notes twA-2 Up to NT$2.5 billion * Asset-Backed Commercial Paper Profile Issuer: Land Bank of Taiwan as trustee for WPI AR Securitization (SPT) Closing date: November 12, 2004 Final Legal Maturity Date: November 12, 2009 Trustee/Back-up Servicer: Land Bank of Taiwan Seller/Servicer: World Peace Industrial Co., Ltd. FX Hedge Provider: International Bank of Taipei Account Bank: Hua Nan Commercial Bank NIF Underwriter and Purchaser of the Notes: China Bills Finance Corporation Liquidity Facility Providers: International Bank of Taipei and Bank Sinopac Arranger: Societe Generale, Taipei Branch and Industrial Bank of Taiwan Rationale The rating addresses the full and timely payment of interest and the ultimate repayment of principal by the final legal maturity date of the ABCP Notes issued by the SPT, which are secured by a revolving portfolio of New Taiwan dollar (NTD) and/or U.S. dollar (USD) denominated trade receivables originated by World Peace Industrial (WPI), an unrated seller. The receivables trustee, Land Bank of Taiwan, issued discounted Notes with a tenor of one month on the closing date and will continue to issue such Notes with a typical tenor of one month on a monthly basis. The rating on the Notes to be purchased by the Notes Issuance Facility (NIF) Provider, China Bills Finance Corporation (China BFC), reflects the following: The dynamic resetting mechanism for credit enhancement based on portfolio performance. The credit enhancement is sufficient to mitigate credit risks associated with the trade receivables; The liquidity facilities, which will fund any shortfalls other than shortfalls that arise due to obligor default, are subject to liquidity funding tests. Regarding other risks, the Liquidity Facility Providers will take on commingling risk, obligor set-off risks, servicer transition risk, and receivables dilution risk, China BFC default risk, f/x swap counterparty default risk, other counterparty risk and f/x risk. In the case of some but not all of the aforementioned risks, the Liquidity Facility Providers have negotiated a certain level of extra credit enhancement to reduce their own exposure; The requirement for ongoing periodic servicer audits and eligibility audits; The financial strength of the Liquidity Facility Providers, eligible investments and bank account providers meet the minimum rating requirements; The contract with Land Bank of Taiwan as the Back-up Servicer; and The requirement for bring-down opinions (legal opinions) on an annual basis at a minimum. Transaction Overview The receivables trustee, Land Bank of Taiwan, has established a new SPT to purchase a revolving portfolio of trade receivables from eligible obligors over a four-year period from WPI. The transfer covers all receivables arising from designated eligible obligors. Those receivables that are ineligible are funded by way of seller trust certificates. The trustee funds the eligible receivables mainly by issuing NTD denominated senior certificates in the form of short-term Notes to China BFC under a committed NIF Facility. China BFC either holds or sells the short-term Notes. The portfolio is serviced by the originator, WPI, until a servicer termination event occurs, whereupon the initial Servicer would be replaced by Land Bank of Taiwan as Back-up Servicer. The quality of the servicer is monitored through servicer audits, which will be conducted on a semi-annual basis at a minimum. This transaction is supported by liquidity facilities totalling NT$2.5 billion, which may be drawn down in either NTD or USD. Under the terms of the liquidity agreement, the Liquidity Facility Providers will fund any shortfall except those caused by obligor defaults. The liquidity facilities, which are subject to a funding formula, will absorb all the risks associated with this transaction except obligor defaults. In other words, the Liquidity Facility Providers will absorb various risks such as commingling, dilution, servicer transition and also foreign exchange losses that may arise due to the variance in foreign exchange rates between the time when the credit enhancement is sized and the time of actual obligor default. The transaction has certain structural elements that are intended to provide partial mitigation for some of these risks for the benefit of the Liquidity Facility Providers; in particular, the dilution reserve specified by the Liquidity Facility Providers. In addition to investor trust certificates, the SPT issued subordinated certificates and seller certificates. The seller certificates fund ineligible receivables and eligible receivables not taken into account in the borrowing base which back the rated short- term Notes. The transactions have a revolving period, a wind-down period, and a Notes Stop Issuance trigger. During the revolving period, the SPT, subject to certain conditions set down in the transaction documents, will continue to purchase receivables from WPI. Upon the earlier occurrence of any wind-down event or four years from closing, the program will enter into a wind-down period, during which no further receivables may be purchased. Collections from the existing receivable portfolio will be used to retire outstanding short-term Notes. When an Notes Stop Issuance event occurs, the SPT will cease to issue new short-term Notes and all outstanding short-term Notes will be repaid in full, except in the event of payment default on the short term notes, from drawdown against the liquidity facilities. This transaction is Taiwan¡¦s first trade receivable securitization, and also the first domestic transaction to tap short-term note funding. Seller/Servicer Established in June 1981, WPI is a semiconductor components distributor. Its product lines include ASP, CPU, memory, standard devices from international suppliers such as Intel, Texas Instruments, Hynix and Philips. The company reported consolidated net sales of NT$55.2 billion in 2003 and is ranked the top Taiwanese components distributor based on net sales. WPI distributes its products worldwide though the domestic market, which has accounted for about half of WPI¡¦s net sales in recent years. Liquidity Banks The two Liquidity Facility Providers, International Bank of Taipei (twA+/Stable/twA-2) and Bank Sinopac (twA+/Stable/twA-2) provide liquidity funding for the transaction on several basis. Under the liquidity agreement, the trustee may make prorated draws on the liquidity lines, or, under certain circumstances, may draw solely against a single liquidity lender for the full amount of the liquidity drawdown. Collateral Each receivable must meet Eligible Customer, Eligible Products and Eligible Receivables criteria in order to be considered part of the borrowing base. Receivables could be denominated in NTD or USD. Some of the receivables may be backed by promissory notes, guarantee letters, certificates of deposit, or bank letters of credit. The maximum contractual payment term of any receivable may not exceed six months, and, in particular, the weighted average payment terms must be kept at three months or lower. Credit Support Taiwan Ratings Corp. applied Standard & Poor¡¦s sales-based approach in trade receivable criteria. Under this method, credit loss is sized on a dynamic basis but subject to a floor reserve amount. In a sales-based approach, credit enhancement is based on arrears as proxy delinquency, and the methodology uses a time matched principle, so that defaults or dilutions incurred can be traced back to previously originated sales. In this way, the analysis is not skewed by seasonal factors. The senior certificates are credit enhanced by over-collateralization of the receivables and various reserves. Structural Analysis Funding Reserves The receivables are purchased at a discount. The discount, together with part of the reserves, is sized to ensure that all costs of the deals, including interest expenses and funding costs, can be met, even though in some situations no new receivables may be purchased. Account payable set-off risk Some of WPI¡¦s clients are also WPI¡¦s suppliers. This leads to opportunities for offsetting trade payables against trade receivables. In the case of WPI, accounts payable are netted off against the eligible receivables, and to protect the investor during the wind-down period, an accounts payable reserve is sized based on historical data to quantify the magnitude of set-off. Dilution Risk Dilution routinely arises in companies and may be due to product returns, inaccuracies in the billing/invoicing system, or reduced pricing or claims under warranties that can be legally claimed up to five years. The Liquidity Facility Providers who assume the dilution risks have required additional reserves to reduce their exposure in a worst case scenario. Foreign exchange risk The trade receivables are denominated in either NTD or USD, and the senior certificates are denominated in NTD. To mitigate currency risk, the SPT enters into spot forwards contracts which match the maturity and notional principal amount of the short-term Notes issued to finance USD receivables. However, FX volatility may lead to higher losses as the portfolio of receivables will not be fully hedged into NTD and higher losses could result when USD losses are translated into NTD. The Liquidity Facility Providers have agreed to fund such FX related losses. However, The Liquidity Facility Providers have required additional reserves to reduce their exposure in a worst case scenario. Ultimately, the risk will be covered by over-collateralization of the receivables and the Liquidity Facility Providers. Servicing Risks WPI acts as the initial Servicer for the underlying portfolio. Upon the occurrence of certain events, the Land Bank of Taiwan will replace WPI as the Servicer for the transaction. Cash reserves are fully funded at closing to mitigate potential servicer transition risk. Liquidity/Short-Term Note Rollover Risks There are two sources of liquidity in this transaction. The NIF Provider has committed to a five-year agreement to purchase all the short-term notes issued by the SPT. The liquidity facilities can be drawn down subject to meeting liquidity drawdown tests. Liquidity is available in either NTD or USD in same day funds in order to ensure that the spot forward contracts are settled properly, to fund any cash shortfalls (other than those due to obligor defaults), and also to ensure the full repayment of any outstanding short-term Notes upon most of the Notes Stop Issuance events. Notes Stop Issuance events include, but are not limited to, payment default on the short-term notes, the termination of the liquidity facilities without replacement, termination of the spot forward agreements, downgrade of the rating on the short-term notes to twB or below, unused availability under the liquidity facilities is insufficient to retire all the outstanding short-term notes, illegality, bankruptcy of the trustee, unhedged foreign exchange losses funded by the liquidity facilities in the aggregate exceeding five percent. An additional feature of this transaction is that liquidity may be transferred to another eligibly rated Liquidity Facility Provider, or a downgrade drawdown can be made in respect of a Liquidity Facility Provider when its rating is downgraded to below tw A- for a long-term rating or twA-2 for a short term rating, has a long-term rating of twA- but on credit watch negative. The Liquidity Facility Providers will backstop China BFC and the short-term notes. Liquidity funding conditions have been checked to ensure that, except under very restricted conditions, liquidity will be available and drawable to repay outstanding CP. When the trustee determines that one of the Liquidity Facility Providers is unable to fund or is in default, then the trustee is permitted to fully draw on the lines of the other Liquidity Facility Provider to repay outstanding short-term notes. Legal and Tax Analysis The transaction is governed by Taiwan's Financial Asset Securitization Law (FASL) and is supported by a true sale opinion. The trust established under FASL is a legal trust and has been accepted as bankruptcy remote. Article 3 of the FASL Enforcement Rule explicitly allows periodic assignment/entrustment to the trustee in a securitization. This is a revolving transaction, and legal counsel will provide bring-down legal opinions on each anniversary of this transaction after closing. Taiwan Ratings Corp. obtained tax rulings and tax opinions prior to closing that are satisfactory in form and substance.