Presale: Land Bank of Taiwan as Trustee for the
Industrial Bank of Taiwan Corporate Loan Securitization Special Purpose
Trust 2005-1
Analysts: |
Joseph
Cheng
Clementine Kiang
|
This presale report is based on information
as of Jan. 23, 2006. The ratings shown are preliminary. This report does
not constitute a recommendation to buy, hold, or sell securities. Subsequent
information may result in the assignment of final ratings that differ
from the preliminary ratings.
Rating
Details
Senior
Certificates:
|
Preliminary
Rating*
|
Amount
(NT$ mil.)
|
Annual
Coupon Rate (%)
|
Credit
Support (%)
|
Class
1
|
twAAA
|
3,025
|
1.6195
|
29.98
|
Class
2
|
twAA
|
95
|
1.8695
|
27.78
|
Class
3
|
twA
|
470
|
1.9695
|
16.90
|
Class
4
|
twBBB-
|
135
|
2.3695
|
13.77
|
*The rating for each class of certificates
is preliminary and subject to change at any time.
Profile
Issuer: Land Bank of Taiwan (Land
Bank) as Trustee for the Industrial Bank of Taiwan (IBT) Corporate Loan
Securitization Special Purpose Trust 2005-1 (the SPT)
Issue: NT$4.32 billion senior and
subordinated beneficial certificates due 2011
Expected Closing Date: [Feb. 17], 2006
Trustee/Back-up
Servicer/Account Bank: Land Bank
Trustor/Originator/Servicer: IBT
Rationale
Taiwan Ratings Corp.
expects to assign its 'twAAA', 'twAA', 'twA', and 'twBBB-' ratings to
senior beneficial certificates of NT$3.025 billion (Class 1), NT$95 million
(Class 2), NT$470 million (Class 3), and NT$135 million (Class 4) due
in 2011. The certificates will be issued by Land Bank in the capacity
of Trustee for the SPT. The ratings address the timely payment of interest
and ultimate full repayment of principal on or before the senior certificates'
legal maturity date, Nov. 17, 2011. The trust certificates will be backed
by a static pool of corporate loans (the loan portfolio) originated by
IBT. This is going to be the fourth Collateralized Loan Obligation (CLO)
originated and arranged by IBT.
The preliminary ratings
are based on information as of Jan. 23, 2006. Final ratings are subject
to subsequent information provided.
The ratings are based
on:
- The credit quality
of the portfolio;
- The level of credit
support for the different classes of senior certificates provided by
subordinated certificates;
" The liquidity cash reserve set aside on closing day;
- Sufficient cash
flow to meet timely payment of interest and ultimate repayment of principal
by the final legal maturity date for each class of senior certificate
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 and eligible investments;
- Satisfactory legal
and tax opinions, and
- The bankruptcy
remoteness of the SPT.
Originator
IBT was officially set up as an industrial bank in July 1999. As of the
publication date of this report, Taiwan Ratings' long-term counterparty
credit rating on IBT is 'twA-', the short-term rating is 'twA-2', and
the outlook on the long-term rating is positive.¡@
Transaction
Overview
At closing, IBT will
entrust the loan portfolio consisting of 28 New Taiwan Dollar denominated
bilateral loans to the SPT. Land Bank as the Trustee shall accept the
entrust afforesaid on behalf of the SPT and in turn issue two types of
certificates, namely senior beneficial certificates and subordinated beneficial
certificates. The senior beneficial certificates will be sold to investors
by public offering and the proceeds therefrom paid to IBT. The subordinated
beneficial certificates will be privately placed to IBT.
Terms
of the Senior and Subordinated Beneficial Certificates
The senior beneficial
certificate holders will receive fixed-rate coupon payments at the rate
specified on the indenture. The subordinated beneficial certificates will
be further divided into 3 classes with the 2 relatively senior ranked
classes bearing stipulated coupon rates and the junior most class entitled
to residual interest collection, if any. All 3 subordinated beneficial
certificate classes, however, are non-rated. All coupon payments to both
senior and subordinate beneficial certificates will be made on a semi-annual
basis. When there is any shortage with respect to senior fees and senior
beneficial certificate coupon payments, firstly, the principal collection,
and secondly, the cash reserve, will be used to temporarily cover this
shortage.
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 interest distribution, however, is subject to withholding tax at the
rate stipulated by the tax authority. Consequently, interest received
by certificate holders will be net of tax withheld.
Except for the first
period, principal payments will be made on a pass-through basis every
6 months. Principal of subordinated beneficial certificates will only
be paid after senior beneficial certificates have been fully redeemed.
There is no withholding tax on the principal payment.
The
Loan Portfolio
The asset pool is going to be static, i.e. neither can IBT entrust new
loans to the SPT nor can any transaction party substitute any existing
loans after closing date. As of the closing date, 28 New Taiwan Dollar
denominated bilateral loans will be included in the loan portfolio, 27
of which are existing loans while one will be newly originated. All loans
are non-revolving, fixed-rate, and fixed-term amortizing bank loans. Each
loan constitutes an unsecured senior obligation of the obligor.
The main features
of the loans include:
- Fixed coupon rate,
which obligors have no option to change;
- All payments (interest
and principal) are in New Taiwan Dollars and obligors have no option
to change the payment currency;
- Amortization follows
a pre-defined schedule and obligors have no option to change it (including
prepayment);
- Interest payments
will be grossed up for taxes and stamp duties and obligors are responsible
for such gross-up;
- Any overdue interest
and/or principal will fall due by the last payment date;
- All loans are
non-revolving, set-off prohibited, and non-transferable; and
- All obligors must
remit their repayments (interest, principal and tax gross-up) directly
to the trust accounts.
The loan portfolio
is concentrated in a number of industries, including but not limited to,
air-transport, semiconductors, building and development, and computer
storage and peripherals. The obligations included in the top 5 concentrated
industries account for over 77% of the total pool size. The average loan
size is around NT$150 million and the weighted average coupon rate is
around 2.4%. The top 4 obligors account for 48.61% of the total pool balance
as of the publication date while each of the remaining obligors accounts
for less than 5% of the total pool balance. All the above mentioned features
have been incorporated into Taiwan Ratings' analysis in deciding required
credit support for each rating level.
Credit
and Cash Flow Analysis
As most of the obligors are not publicly rated, Taiwan Ratings has performed
credit assessments on all of the unrated obligors to determine their credit
quality.
The results of such
credit assessments along with obligor and industry concentrations, loan
size, and loan maturities were incorporated into Standard & Poor's
CDO EvaluatorTM to determine the default risk of the loan portfolio. CDO
EvaluatorTM applies the Monte-Carlo methodology to integrate all abovementioned
factors in determining the maximum level of defaults that a Collateralized
Debt Obligation (CDO) class must be able to withstand at a given rating
level.
Furthermore, Taiwan
Ratings has performed cash flow analysis under various stress scenarios
to verify the prompt interest payment and ultimate principal repayment
of the senior beneficial certificates.
Structural
Analysis
Commingling
risk.
The commingling risk will be remote with this transaction. Under normal
circumstances, all obligors will be required to remit their payments directly
to the trust accounts where the account bank should possess commensurate
rating at all times. When the obligors, for whatever reason, remit the
payments instead to IBT, or when there are any recovery proceeds from
working out the defaulted obligations, IBT must remit these proceeds to
the trust account within one business day.
Obligor set-off
risk.
The set-off risk with this transaction is going to be mitigated by virtue
of a specific waiver of the set-off rights by all obligors. The legal
opinions shall opine that such waiver is legal, binding and enforceable
against each obligor under current Taiwan laws.
Interest
rate risk.
There will be no interest risk with this transaction. Both the asset and
the liability of the SPT have fixed interest rates. As such, the transaction
is going to be isolated from interest rate volatility.
Prepayment and
Negative Carry risk.
Prepayment risk for this transaction will be limited while negative carry
risk will be appropriately mitigated. The obligors are not allowed to
prepay. Nevertheless, under certain circumstances such as obligors' breaching
of covenants or occurrence of early amortization events, the investors
will be exposed to prepayment risk. The principal prepayments will be
passed through to investors once the accumulated prepayment is higher
than the stipulated amount. If the accumulated prepayment, however, is
lower than the stipulated amount abovementioned, negative carry risk might
arise. Taiwan Ratings has incorporated the negative carry risk into the
cash flow analysis and sized an appropriate liquidity reserve, which will
be set aside at closing, to mitigate the risk.
Liquidity risk.
There will be virtually no liquidity risk for this deal. The principal
collection will be used to cover the interest cash flow items ranking
in priority higher than (and including) the senior certificate interest
payment, which is indeed a strong support considering the amortization
feature of the asset pool. Also, a cash reserve will be sized to cover
the liquidity risk under certain scenarios. Both features mentioned above
have been incorporated into the cash flow analysis.
Servicing Termination/Transition
Risk
Servicing Transition Risk will be limited. The existence of a backup servicer,
Land Bank, assures the smooth transition upon the occurrence of servicer
termination events. In addition, a cash reserve will be sized and fully
funded at closing to mitigate the potential liquidity risk during the
transition period.
Legal
Analysis
The transaction will be structured in accordance with the Financial Asset
Securitization Law of Taiwan, which provides the foundation for the establishment
of the SPT, the perfected transfer of assets from the originator to the
SPT, and protection from other third parties' claim. Taiwan Ratings must
receive satisfactory legal and tax opinions prior to the closing of the
transaction.
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