Rating Details
* The amount is 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. The Trust: First Commercial Bank 2006-2 CBO Securitization Special Purpose Trust (the SPT) Issuer/Trustee: The Hong Kong and Shanghai Banking Corp. Ltd., Taipei Branch (HSBC Taipei, HSBC, Global Scale Ratings AA-/Positive/A-1+ (Standard & Poorˇ¦s Ratings Services) Expected Closing Date: July 13, 2006 Final Legal Maturity Date: July 13 2036 Seller: First Commercial Bank Ltd. (First Commercial Bank, Global Scale Ratings BBB+/Stable/A-2, National Scale Ratings twAA-/Stable/twA-1) Interest Rate Swap (IRS) Provider/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, Global Scale Ratings A/Stable/A-1+) Joint Underwriter (of Senior Certificates): ICBC and The Shanghai Commercial & Savings Bank Ltd. (SCSB, National Scale Ratings twAA-/Stable/twA-1) NTD Asset Vendor: International Investment Trust Co. Ltd. Arrangers: ICBC
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The Trustee on behalf of the SPT acquires the portfolio, issues new CP, and repays maturing CP on a quarterly basis, issues unrated Junior Certificates, and enters into transaction documents. Terms and Conditions of the Senior Certificates Rollover Mechanism The Senior Certificates in the form of CP will have a typical tenor of 3 months. The trustee will calculate required proceeds defined in accordance with 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 Trust Certificates (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. 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:
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 Assets. Under such events, the purchase price has to be sufficient to pay down all rated tranches outstanding:
Charge-off Trust Certificates will be charged off when the losses on defaulted assets are realized. Interest Rate Swaps At closing, the SPT entered 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 the transaction documents, 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 or assets representation is breached and the Seller has to buy back). 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 US dollar assets, the SPT entered into a CCS at closing. During the life of the transaction, the SPT will pass through the US dollar 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. The collateral with the par value of NT$7,546,306,800 equivalent consists of a portfolio of 13 NT dollar denominated bonds and debentures and 19 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 about 14.7% of the total portfolio. All of the NT$2.99 billion of NT dollar assets are structured coupon bonds and have bullet payment schedules. These NT dollar assets are senior debts of nine issuers. The deal has a static pool and no substitution on the assets is allowed after closing. 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 timely and fully repayment of 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:
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 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 compared to the target rating of CP. Prior to assigning the final ratings and the closing of the transaction, Taiwan Ratings has received satisfactory legal and tax opinions.
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