Calyon, Taipei Branch 2005-1 CBO Securitization Special Purpose Trust

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.

Rating Details

* The amount is to be financed at closing through the issuance of Senior Certificates in commercial paper (CP) form. The actual face value of CP issued at closing was 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)

Closing Date: December 21, 2005

Final Legal Maturity Date: September 22, 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 Underwriters (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 final ratings assigned to the Senior Certificates, Class B and Class C Mezzanine Certificates 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 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 have provided CP purchase commitment to the SPT to mitigate CP rollover risk.

Structural Overview

The Trustee on behalf of the SPT acquires the portfolio, issues new CP and repays maturing CP on a quarterly basis, issues Class B and C Mezzanine Certificates and unrated Junior Certificates, and enters 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 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 US dollar (USD) Assets. Under such events, the purchase price has to be sufficient to pay down all rated tranches outstanding:

• All the NT dollar (NTD) assets have been redeemed in full;
• All the NTD assets have been sold by the Trustee;
• Principal outstanding of NTD 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 entered into IRS with the IRS provider in respect of NTD assets. On an ongoing basis, the SPT will pay the collections from the underlying NTD 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 documents, in case of any NTD 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 NTD 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 entered into a CCS 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 is 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 incurred. 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 NTD denominated bonds and debentures and 25 USD 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 NTD assets have bullet payment schedules. These NTD assets are senior debts of just five issuers. Moreover, they are all structured coupon bonds, which currently generate very thin yield.

The deal has 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 NTD 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 NTD 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 NTD 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 have commited 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 received satisfactory legal and tax opinions.