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Presale : Calyon, Taipei Branch 2005-1 CBO Securitization Special Purpose Trust
| Analysts: |
Jerry
Fang
Clementine Kiang
Joseph Cheng
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This
presale report is based on information as of December 20, 2005. The ratings shown are preliminary.
This report does not constitute a recommendation to buy, hold, or sell
securities. The ratings also do not address the likelihood or timing of
prepayment. Subsequent information may result in the assignment of final
ratings that differ from the preliminary ratings.
Rating
Details
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Class
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Preliminary Rating*
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Preliminary Amount
(NT$)
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Preliminary Credit Support (%)
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Senior Certificates
(commercial paper)
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twA-2
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8,636,780,625**
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18.
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Class
B Mezzanine Certificates
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twBBB
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105,300,000
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17.
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Class C Mezzanine Certificates
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twBBB-
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105,300,000
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16.
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* The rating of each class
of certificates is preliminary and subject to change at any time.
** The preliminary amount
is the amount to be financed at closing through the issuance of Senior
Certificates in commercial paper form. The actual face value of CP to
be issued at closing will be calculated in accordance with the transaction
documents.
Profile
The
Trust: Calyon, Taipei Branch 2005-1 CBO Securitization Special Purpose
Trust (the SPT)
Issuer/Trustee: The Hong Kong and Shanghai Banking Corp. Ltd.,
Taipei Branch (HSBC Taipei, HSBC rated AA-/stable/A-1+ by Standard &
Poor's Ratings Services)
Expected Closing Date: December, 2005
Final Legal Maturity Date: June 25, 2036
Seller/Interest Rate Swap (IRS) Provider: Calyon, Taipei Branch
(Calyon Taipei, Calyon rated AA-/stable/A-1+ by Standard & Poor's
Ratings Services)
Cross Currency Swap (CCS) provider/Custodian/Credit Impaired Asset
Put Provider/Clean Up Put Provider/USD Assets Vendor/Account Bank:
International Commercial Bank of China (ICBC, rated A/stable/A-1+ by Standard
& Poor's Ratings Services)
Joint Underwriter (of Senior Certificates): ICBC and Chung Hsing
Bills Finance Corp. (Chung Hsing BFC, twAA/stable/twA-1)
NTD Asset Vendor: International Investment Trust Co. Ltd.
Arrangers: Calyon Taipei and ICBC
Rationale
The preliminary ratings
assigned to the Senior Certificates, Class B and Class C Mezzanine Certificates
to be issued by the issuer reflect:
- The credit enhancement
provided through the subordination of cash flows to the respective class;
-
The transaction・s cash flow structure,
which has been subjected to various stresses requested by Taiwan Ratings
Corp.;
-
The transaction・s CCS and IRS;
-
The Commercial Paper (CP) purchase commitment provided
by the Joint Underwriters;
-
The cash reserves of NT$80 million fully funded before
or at closing;
- The ratings of
the supporting parties including ICBC, Calyon Taipei, and Chung Hsing
BFC; and
-
The legal structure of the transaction, including the
bankruptcy remoteness of the SPT.
Strengths,
Concerns and Mitigating Factors
Strengths:
-
Each asset or each issuer of the asset
of the portfolio is rated twAA- or above, or credit-assessed by Taiwan
Ratings, or is publicly rated investment grade by Standard & Poor・s;
and
-
Interest rate risk and foreign currency risk are adequately
hedged through IRS and CCS.
Concerns:
-
Industry concentration. In terms of asset
par value, US mortgage backed securities (US MBS) account for around
60% of the portfolio; and
-
There is no typical liquidity facility in this transaction
to mitigate CP rollover risk.
Mitigating Factors:
-
Although around 60% of the portfolio is
concentrated in US MBS, such concentration has been taken into account
by Standard & Poor・s CDO Evaluator when determining the loss threshold
that this transaction has to withstand at various rating levels.
-
The Joint Underwriters will provide CP purchase commitment
to the SPT to mitigate CP rollover risk.
Structural
Overview
The Trustee on behalf
of the SPT will acquire the portfolio, issue new CP and repay maturing CP
on a quarterly basis, issue Class B and C Mezzanine Certificates and unrated
Junior Certificates, and enter into transaction documents.
Terms
and Conditions of the Notes
Senior
Certificates
The Senior Certificates
in form of CP will have a typical tenor of 3 months. The trustee will calculate
required proceeds defined in accordance of the transaction document in advance.
Based on the required proceeds, new CP will be issued at discount on each
CP rollover day and sold to the Joint Underwriters. The Joint Underwriters
will commit to purchase those CP except under very limited situations. The
Joint Underwriters will either hold or sell the Senior TC. The net proceeds
from CP issuance, together with the collections from underlying assets and/or
proceeds from swap settlement (if any), will be paid according to priority
of payments, including the redemption of maturing CP.
Mezzanine Certificates
The SPT
will pay interest quarterly in arrears based upon the 90-day CP secondary
market rate, and pay down principal in accordance with the priority of payments
defined in the transaction documents.
Issuance
of CP
The
trustee will continue to issue new CP until the earliest of Senior TC Legal
Final Maturity Date or the occurrence of any of the following events:
- Available proceeds
for distribution (taking into account the net proceeds expected to raise
from new CP issuance) are expected to be insufficient to pay down senior
fees and expenses as well as maturing CP;
- The rating of CP
falls below the rating of twA-3;
-
The occurrence of a Sale Event;
-
A Clean Up Put Option is exercised.
Credit
Impaired Put Options
The Credit Impaired
Put Provider is obligated to purchase Credit Impaired Assets to maintain
the CP rating of at least twA-3 if the likely downgrade of the CP rating
is caused by the deterioration of asset quality.
Clean
Up Put Option
When one of the following
events occurs, the Clean Up Put Provider is obligated to purchase all of
the USD Assets. Under such events, the purchase price has to be sufficient
to pay down all rated tranches outstanding:
-
All the NT dollar assets have been redeemed in full;
-
All the NT dollar assets have been sold by the Trustee;
-
Principal outstanding of NT dollar assets becomes zero.
Charge-off
Trust Certificates will
be charged off when the losses on defaulted assets are realized.
Liability
Hedging
Interest
Rate Swaps
Before closing, the SPT will enter
into IRS with the IRS provider in respect of NT dollar assets. On an ongoing
basis, the SPT will pay the collections from the underlying NT dollar
assets to the IRS provider. In return, the IRS provider will pay the SPT
floating-rate coupons based on the 90-day CP secondary market rate on
a quarterly basis.
The IRS is structured
as a portfolio swap. Under the terms of transaction docuements, in case
of any NT dollar bond・s default, the swap notional amount will not be amended
(unless such bond becomes Credit Impaired Assets and the Put provider has
to buy out). As such, while the SPT may be exposed to risk of paying over-hedging
costs should any NT dollar bond default and subsequently not be purchased
by the Credit Impaired Asset Put Provider, this risk has been addressed
in cash flow tests.
Cross
Currency Swap
In respect of the USD assets, the
SPT will enter into a CCS on or before closing. During the life of the
transaction, the SPT will pass through the USD principal collections from
the underlying assets and pay interest based on one-month Libor rate to
the CCS provider, and receive interest proceeds based upon CP Rate and
principal collection on each hedge payment day.
The CCS will be on a
portfolio basis. If there is any deviation from expected swap schedule,
CCS Additional Charges payable to the CCS Provider by the SPT may be incurrd.
However, such additional charges will have no impact on rated tranches as
they rank subordinated to the rated tranches in the waterfall.
Collateral Characteristics
The collateral with the par value
of around NT$10,532,659,299 equivalent consists of a portfolio of 13 NT
dollar denominated bonds and debentures and 25 US dollar denominated MBS.
US MBS is the major asset type in the portfolio. Moreover, the aggregate
par amount of the bonds issued by two supranational entities rated AAA
by Standard & Poor・s accounts for around 23% of the total portfolio.
All of the NT$4.1 billion
of NT dollar assets have bullet payment schedules. These NT dollar assets
are senior debts of just five issuers. Moreover, they are all structured
coupon bonds, which currently generate very thin yield.
The deal will
have a static pool and no substitution on the assets is allowed after closing.
Credit
and Cashflow Analysis
Standard & Poor's CDO Evaluator
was utilized to determine the expected default rate for the portfolio
at each rating level. Through a Monte-Carlo simulation, the CDO Evaluator
factors the probability of individual bond issuer default, obligor concentration
(guarantee banks were considered for bank guaranteed bonds in estimating
credit risk of each underlying asset), industry correlations, and maturity
of each asset, and computes the expected level of default that each CDO
tranche would be able to withstand at a given rating level.
In addition, to verify
that full and timely payment of interest and ultimate repayment of principal
on the certificates can be met, Taiwan Ratings performed a cash flow analysis
and subjected the transaction to a variety of stress scenarios.
The following elements
were taken into account in the modeling to capture the specifics of the
transaction:
-
Various default patterns were modeled, including front-end
losses, evenly-spread losses, and back-end losses;
-
For NT dollar denominated assets, moderate recovery rates
were assumed. Recovery rates were reviewed and adjusted by Taiwan Ratings
case by case, mainly based upon the seniority of the debt and industry.
Recoveries were modeled with adequate time for workout after default.
-
For US MBS, recovery rates and recovery timing were assumed
according to Standard & Poor・s criteria. In addition, haircut is
applied to such recovery rates to take into account foreign exchange
risk as CCS will not cover the currency risk on the recovered amount
in case of the default of US MBS.
-
The exercise of the Clean Up Put is modeled in accordance
with the transaction document.
-
The bias of defaults is modeled to stress pool yield should
US MBS default and to test the impact of paying over-hedging expense
should NT dollar assets default.
-
To capture the effect of the prepayment of underlying
US MBS, three prepayment stress scenarios are modeled. The three scenarios
are expected prepayment speed (base case), accelerated prepayment speed,
and decelerated prepayment speed according to the criteria of Standard
& Poor・s and Taiwan Ratings.
-
In terms of interest rate scenarios, different scenarios
were applied to test the impact of different interest rate environments
on the structure・s ability to pay over-hedging expense in case of the
default of NT dollar assets. Specifically, Taiwan Ratings subjected
the transaction・s cash flows to interest rate paths that increased over
time, declined over time, declined and then increased, increased and
then declined.
-
The extension expense of CP was modeled for each CP・s
rollover over the course of the transaction. Such expense may incur
when the original CP maturity date becomes a non-business day due to
unexpected systematic events and therefore the CP extends without default
and matures on the following business day.
Structural Analysis
Liquidity/CP
Rollover Risk
The Joint Underwriters
will commit to purchase all the CP issued by the SPT unless one of the
events mentioned in Issuance of CP Section occurs. Moreover, the only
situation where the Joint Underwriters can terminate the underwriting
agreement is when the SPT fails to pay maturing CP. Therefore, this transaction
is rating dependent on the ratings of the Joint Underwriters.
The
Joint Underwriters will not be obligated to purchase new CP should the
rating of CP be lower than twA-3. Credit Impaired Put Options are in place
to mitigate such risk if the likely downgrade is caused by the deterioration
of asset quality. The likelihood of the downgrade in the rating of the
CP below twA-3 caused by a downgrade in one or more of the Joint Underwriters
is mitigaged by the the replacement mechanism in place in respect of the
Joint Underwriters.
Commingling
Risk
There is no commingling risk in
this transaction since the payments from the underlying assets will be
remitted directly to the SPT's account.
Set-off
Risk
Set-off risk is negligible in this
transaction given that the seller is highly rated.
Legal and Tax Analysis
Prior to assigning the final ratings and the
closing of the transaction, Taiwan Ratings will need to receive satisfactory
legal and tax opinions.
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