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This presale report is based on information as of February 27, 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.
* The rating of each class of certificates is preliminary and subject to change at any time. Trust: President Securities Corporation Collateralized Bond Obligation (President Securities CBO) 2006-1 (the Special Purpose Trust (SPT)) Expected Closing: March 2006 Final Legal Maturity Date: Sept. 20, 2013 Originator: President Securities Corporation (President Securities, twA-/stable/twA-2) Trustee/Issuer: International Commercial Bank of China (ICBC, rated A/stable/A-1 by Standard & Poor・s Ratings Services) Transaction Administrator/Account Bank/ Swap counterparty: The Hong Kong and Shanghai Banking Corp. Ltd., Taipei Branch (HSBC Taipei, HSBC rated AA-/stable/A-1+ by Standard & Poor・s Ratings Services) Arrangers:
HSBC Taipei and President Securities The two tranches of certificates to be issued by the issuer will be backed by a portfolio of 20 New Taiwan dollar (NT dollar) denominated corporate bonds and bank debentures, as well as one United States dollar (US dollar) denominated Synthetic Collateralized Debt Obligation (SCDO). The ratings address the full and timely payment of interest and full repayment of principal on or before the final legal maturity date on Sept. 20, 2013. The final ratings are expected to be assigned on the closing date subject to a satisfactory review of all documents, as well as legal and tax opinions. The preliminary ratings are based on the following factors: 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; The transaction・s cross currency swap and interest rate swaps; The supporting ratings of the swap counterparty and the bank account provider of this transaction, as well as the collateral securities and the swap counterparty of the SCDO tranche in the underlying pool, The legal structure
of the transaction, including the bankruptcy remoteness of the SPT. President Securities
Corporation (President Securities, twA-/stable/twA-2) Strengths, Concerns and Mitigating Factors: Strengths:
Concerns:
Mitigating Factors:
At closing, the Originator will transfer US dollar denominated SCDO and NT dollar denominated corporate bonds and bank debentures with interest rate swaps embedded to the trust. The trustee on behalf of the trust will issue NT dollar denominated class A [twAAA] and class B [twA] trust certificates (collectively ：Senior Trust Certificates；) and unrated subordinated trust certificates. The senior trust certificates will be sold to investors. Part of the proceeds raised from investors will be converted into US dollars with the swap counterparty. The US dollar proceeds, together with the remaining NT dollar proceeds and the subordinated trust certificates, will be paid to the Originator in consideration of the transferred SCDO and NT dollar bonds. The deal has a static pool from closing and no substitution of trust asset is allowed. During the life of the transaction, the SPT will collect US dollar proceeds and NT dollar proceeds based upon different reference rates from the underlying assets. The SPT will have cross currency swap and interest rate swaps to convert such cash flow into floating rate based cash flow at predetermined exchange rate (if applicable) to pay floating rate coupon rates to certificate holders. The interest collections will be distributed in accordance with interest waterfall. Especially, should there be swap termination expenses payable to the swap counterparty in accordance with the transaction documents, such expenses will be paid after the coupon of Senior Trust Certificates is paid and the amount previously borrowed from principal collection is returned to principal collection account. The principal collections will be first used to cover interest shortfall in respect of the amount payable to rated tranches. Should there be swap termination expenses payable to the swap counterparty (except that the swap counterparty is the defaulting party), the remaining principal collections will be paid to the swap counterparty. After the payment of swap termination expenses, the remaining principal collections will be used to pay down the trust certificates sequentially. In terms of SCDO in
the underlying pool, should a credit event occur on an underlying corporate
name, a market recovery rate would be used to calculate loss. The resulting
loss would be incurred and accumulated for the SCDO tranche. If total
losses exceed the loss threshold for the SCDO tranche, the interest bearing/redemption
amount of the SCDO would be reduced by the excess amount. In other words,
a principal loss would be incurred in the trust assets at CBO level. However,
the SCDO with reduced redemption amount would remain in the trust asset
of CBO and continue to generate yield based upon initial coupon rate to
the SPT of the CBO. Terms and Conditions of the Notes Interest payment The Senior Trust Certificates will pay floating-rate coupon in arrears in March, June, September, and December starting from June 2006. The coupon is based upon 90 day commercial paper (cp) secondary market rate, and the reference rate is reset quarterly. Should the SCDO experience any potential credit event in the last collection period, the trust distribution date will be reset to match the relevant terms of the SCDO. Principal payment The
transaction is structured as a pass-through with principal repayments
being used to repay the trust certificates as they are received. Interest Rate Swaps This transaction is exposed to interest rate risk because the SPT will receive structured coupon rates such as inverse floater (a constant rate minus a floating reference rate) and range accrual (coupon rate depends on which range the reference rate falls in) from the underlying NT dollar assets but will pay cp-based-floating-rate coupon rates on Senior Trust Certificates. The relevant interest rate risk will be eliminated through asset specific interest rate swap on each NT dollar denominated bond. In the event of any NT dollar asset default and the immediate termination of the relevant swap, the potential swap breakage cost payable to the swap counterparty, if any, could negatively affect the cash available for distribution to the certificate holders. To mitigate such risk, the swap breakage cost payable to the swap counterparty (if any) ranks subordinated to the coupon of the rated certificate holders in interest waterfall, but ranks senior to the principal payment to the rated certificate holders in principal waterfall. Moreover, interest rate swap breakage cost for each rating level was taken into account when credit sizing. Cross Currency Swap The US dollar denominated SCDO will pay Libor-based coupon in US dollars to the SPT, while the SPT will pay Taiwanese cp-based coupon in NT dollars to certificate holders. The SPT will enter cross currency swap to mitigate the relevant currency risk and basis risk stemming from the mismatch between Libor rate and Taiwanese cp rate. Also, the SPT will have a commitment to enter a series of spot transactions over the course of the transaction to mitigate foreign exchange risk from interest margin on the underlying SCDO. The combination of the abovementioned cross currency swap and spot transactions is meant to act like an ordinary cross currency swap to hedge currency risk and interest rate risk from the underlying SCDO. If
the total losses exceed the attachment point of the SCDO tranche, and
in turn the swap notional amount needs to be adjusted accordingly, no
swap breakage cost would be incurred due to the partial unwinding of the
cross currency swap. The provisional collateral with the par value of NT$10.8 billion equivalent consists of a portfolio of 20 NT dollar denominated bonds and debentures and one US dollar denominated SCDO. The breakdown of the collateral portfolio by asset type and industry is as follows:
In terms of NT dollar assets, exposure of top four local issuers accounts for 32.4% of total assets or 64.8% of NT dollar assets. However, these large exposures are either issued or guaranteed by highly rated banks.
In terms of the SCDO, all reference entities in its portfolio have investment-grade ratings.
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 the type of industry. Recoveries were modeled with adequate time for workout after default. For the underlying SCDO, a market recovery rate will be applied should a credit event occur on an underlying corporate name. The resulting loss is incurred and accumulated for the SCDO tranche. If the total losses exceed the loss threshold of the SCDO tranche, a loss is incurred at the CBO level. This feature was taken into account when running the CDO Evaluator, and therefore removes the need for SCDO recovery assumption. Potential breakage cost of interest rate swap is taken into account by assuming different default timing and interest rate environment. Business
tax on the collections from US dollar denominated SCDO and withholding
tax on the collections from NT dollar assets were deducted from cash available
for distribution in cash flow modeling. 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 There
is no set-off risk in this transaction as the originator is not a deposit
taking institution. 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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