Land Bank of Taiwan as Trustee for the Industrial Bank of Taiwan Corporate Loan Securitization Special Purpose Trust 2005-1

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

Rating Details

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. assigned 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 are 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 are backed by a static pool of corporate loans (the loan portfolio) originated by IBT. This is the fourth Collateralized Loan Obligation (CLO) originated and arranged by IBT.

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 entrusted the loan portfolio consisting of 28 New Taiwan Dollar denominated bilateral loans to the SPT. Land Bank as the Trustee accepted the entrust afforesaid on behalf of the SPT and in turn issued two types of certificates, namely senior beneficial certificates and subordinated beneficial certificates. The senior beneficial certificates were sold to investors by public offering and the proceeds therefrom paid to IBT. The subordinated beneficial certificates were 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 are 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 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 were included in the loan portfolio. 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;
• Amortized following a pre-defined schedule and obligors have no option to change it (including prepayment);
• Interest payment is 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 closing 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 is remote with this transaction. Under normal circumstances, all obligors are required to remit their payments directly to the trust accounts where the account bank should possess accommodated 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 mitigated by virtue of a specific waiver of the set-off rights by all obligors. The legal opinions opine that such waiver is legal, binding and enforceable against each obligor under current Taiwan laws.

Interest rate risk.
There is no interest risk with this transaction. Both the asset and the liability of the SPT have fixed interest rates. As such, the transaction is isolated from interest rate volatility.

Prepayment and Negative Carry risk.
Prepayment risk for this transaction is limited. 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 has been set aside at closing, to mitigate the risk.

Liquidity risk.
There is virtually no liquidity risk for this deal. The principal collection will be used to cover the interest cash flow items ranking higher than (including) the senior certificate interest payment, which is indeed a strong support considering the amortization feature of the asset pool. Also, a cash reserve has been sized to cover the liquidity risk under certain scenarios. Both features mentioned above have been incorporated into the cash flow analysis.

Servicing Transition Risk
Servicing transition risk is limited. The existence of a backup servicer, Land Bank, ensures a smooth transition in the event of servicer termination. In addition, a cash reserve has been sized and fully funded at closing to mitigate the potential liquidity risk during the transition period.

Legal Analysis

The transaction is 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 has received satisfactory legal and tax opinions prior to the closing of the transaction.