Deutsche Bank as Trustee for Capital Securities Corp. Collateralized Bond Obligation Special Purpose Trust 2005-1

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

Rating Details

Profile

Issuer: Deutsche Bank AG, Taipei Branch as trustee for Capital Securities Corp. Collateralized Bond Obligation Special Purpose Trust (SPT)

Closing date: August 26, 2005

Trustee/custodian: Deutsche Bank AG, Taipei Branch

Trustor/originator: Capital Securities Corp.

Arranger: Capital Securities Corp.

Interest rate swap counterparty: Capital Securities Corp.

Account bank: Deutsche Bank AG, Taipei Branch

Legal final maturity date: June 30, 2010

Rationale

The ratings address the full payment of the principal of the rated beneficiary certificates on or before the final legal maturity date of June 30, 2010. The beneficiary certificates are backed by a static pool of Taiwan dollar (NT$) denominated bonds.

The ratings reflect:

• The credit quality of the portfolio;
• The expected commensurate level of credit support in the form of subordination provided by the notes junior to the respective classes;
• The establishment of a cash reserve to cover senior expenses over the life of the transaction;
• The ratings of supporting parties such as the bank account provider and eligible investments; and
• The bankruptcy remoteness of the issuer.

Strengths, Concerns and Mitigating Factors

Strengths:

• All bonds were transferred under the title of the SPT. Principal and interest from the underlying bonds will be directly remitted to the SPT's bank account ;
• The final legal maturity date takes into account adequate time for recovery if any of the underlying bonds default;
• A reserve was sized at closing and topped up over a period to cover all senior expenses incurred during the life of the transaction;
• The transactionˇ¦s sequential payment structure ensures that the more senior rated certificates will be repaid in full before any monies are used to reduce outstanding amounts of the junior classes of certificates; and
• Excess interest will be used to reduce the outstanding principal of the rated tranches after acceleration events are triggered.

Concerns:

• There was an interest rate swap between the SPT and the swap counterparty, Capital Securities. The SPT will receive fixed interest payments from Capital Securities and the SPT will make floating interest payments to Capital Securities. Since the rating of Capital Securities Corp. is not commensurate with the rating required for the more senior certificates, the absence of the company as a swap counterparty may result in an insufficient yield on the portfolio's underlying assets to cover senior expenses; and
• One of the underlying bonds accounts for more than 50% of principal amount of the total portfolio.

Mitigating factors:

• Capital Securities Corp. made a deposit to create a reserve at closing and the reserve will be topped up from excess interest immediately from the first payment date up to a certain amount to ensure that there is adequate funds to pay senior expenses during the life of the transaction. Concerns about the dependency on the swap counterparty rating are mitigated by the existence of the reserve; and
• The features of the underlying bonds are reviewed to take into account possible recovery if the bonds default.

Transaction Overview

At closing, Capital Securities entrusted six NT$ denominated bonds to Deutsche Bank AG, Taipei branch as the trustee for the SPT. The SPT then issued four tranches of rated certificates: class A [twAAA], class B [twAA], class C [twA],and class D [twBBB], and the residual beneficiary [not rated].

The rated certificates do not bear interest. Holders of the rated certificates are entitled to repayment of the full principal amount by the final legal maturity date of the transaction. For underlying bonds carrying floating interest rates, an interest rate swap was entered between the SPT and Capital Securities Corp. The SPT will receive fixed interest payments from the swap counterparty. A cash reserve was set aside at closing and topped up to a certain amount from excess interest (after payments of senior fees and expenses) to cover all senior fees and expenses during the life of the transaction.

On each payment date, the residual beneficiary holder will not be paid even if there is excess interest for distribution to the residual beneficiary. This excess interest will be placed in a residual beneficiary reserve account rather than distributed to the residual beneficiary. On the last payment date, funds from the residual beneficiary reserve will be pooled with those from all other trust accounts and distributed according to the waterfall payment. Although the availability of the residual beneficiary reserve is not a rating requirement, this feature enhances the robustness of the structure as the residual beneficiary reserve may be applied to absorb losses to some extent which would otherwise be incurred by the rated certificates if any bond defaults.

Credit support for the differing tranches is derived from the estimated probable default from the obligors and recovery to repay principal to the certificates by no later than the final legal maturity date of June 30, 2010. The final legal maturity date takes into account the maturity feature of the underlying bond to ensure any back ended losses on the portfolio can be liquidated, and the recovery proceeds from such types of defaulted bonds may be available to repay the certificates.

Collateral Characteristics

The collateral consists of corporate bonds and asset-backed securities. As a static pool, no new bond will be entrusted to the SPT and any existing bonds in the portfolio will not be substituted after the closing date of the transaction. At the closing date, the key attributes of the bond portfolio are as follows:

• Six NT$ denominated bonds including corporate bonds, bank debentures and asset backed securities;
• Senior unsecured bonds or bonds guaranteed by banks;
• There are both fixed-rate or floating rate bonds in the portfolio;
• One of the bonds accounts for 56% of the total portfolio; and
• Floating rate bonds (inverse floaters) will have an interest rate swap in exchange for fixed rate interest from the swap counterparty;

Credit and Cashflow Analysis

All the underlying bonds or their guarantor have public ratings. The expected default rate of different rating categories was determined by using Standard & Poor's CDO Evaluator. Using Monte-Carlo methodology, the CDO Evaluator factors the probability of individual bond default, recovery, obligor concentration, industry correlations and computes the expected level of default that a CDO tranche would be able to withstand at a given rating level. The expected level of default from the CDO Evaluator ensures that ultimate repayment of principal on the certificates can be met.

Because the rated certificates do not bear interest, there will be no ongoing payment of interest on the rated certificates. However, adequate cash flows are required to meet ongoing fee and expense payments over the life of the transaction. A cash flow analysis is conducted under stressed scenarios assuming default of the underlying bonds and swap counterparty. The purpose is to ensure that there are adequate funds to top up reserve after the closing of the transaction and meet senior expense payments throughout the life of the trans

Structural Analysis

Set-off risk exists if the originator has liabilities due to the obligors of the underlying bonds on or before the entrustment of the bonds to the SPT. The risk is mitigated by the representation and warranties of the originator stating that it does not have payment due to the underlying bond issuer at the transfer date of the bonds to the SPT. The transaction will accelerate the principal payment to the rated certificate holders if the originator breaches this representation and warranty and is not resolved within a period of time.

Legal and Tax Analysis

The transaction is structured in accordance with Taiwan's Financial Asset Securitization Law, 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. Prior to assigning the final ratings and the closing of the transaction, Taiwan Ratings received satisfactory legal and tax opinions.