|
This presale report is based on information as of Sept. 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)) The two tranches of certificates to be issued by the issuer will be backed by a portfolio of New Taiwan dollar (NT dollar) denominated corporate bonds and bank debentures, as well as one United States dollar (US dollar) denominated zero coupon covered bond issued by DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank, Global Scale Ratings A/Positive/A-1). The ratings address the full and timely payment of interest and full repayment of principal on or before the final legal maturity in October 2011. 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:
Strengths, Concerns and Mitigating Factors: Strengths:
Concerns and Mitigating Factors:
At closing, the Originator will transfer the US dollar zero-coupon covered bond 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 [twAA-] trust certificates (collectively "Senior Trust Certificates") and unrated subordinated trust certificates, as well as seller certificates. All trust certificates will be sold to investors. Part of the proceeds raised from investors will be converted into US dollars with the swap counterparty. Some of the proceeds will be kept by the SPT as cash reserves. The US dollar proceeds, together with the remaining NT dollar proceeds, will be paid to the Originator in consideration of the transferred US dollar covered bond 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 NT dollar proceeds based upon different reference rates from the underlying NT dollar assets. The SPT will have interest rate swaps to convert such cash flow into floating rate based cash flow to pay floating rate coupon rates to certificate holders. The SPT will not have any cash inflow from the US covered bond within five years from closing, with the exception of if it has to be liquidated as required by the transaction documents. 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 the principal collection account. The remaining interest proceeds after paying down all senior and junior fees and expenses will be kept in a cash reserves account before the US dollar bond is repaid and will be transferred to distribution accounts for seller certificates after the US dollar bond is repaid. 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. Any principal proceeds left for the most junior ranking in principal waterfall will be either deposited into the distribution account for Subordinated certificates up to principal outstanding of Subordinated certificates after the US dollar bond is repaid or otherwise to the cash reserves account. Regarding liquidity, the SPT will have cash reserves of NT$224 million and a liquidity line of NT$900 million at closing. Cash reserves are sized to cover potential interest shortfall arising from interest rate risk and asset default risk under the stress scenarios commensurate with each rating level. As to the liquidity line, it will cover potential interest shortfall after the cash reserves are used up. However, because the liquidity line can be cancelled at any time at the liquidity provider's discretion, TRC doesn't take it into account in analysis. As such, the liquidity provider is not rating dependent and there is no minimum rating requirement for it. In addition to other circumstances required by the transaction documents, if there is still principal outstanding of rated tranches, the SPT can liquidate in part or all of the US dollar assets to pay down rated tranches by legal final maturity of the rated tranches. Terms and Conditions of the Notes Interest payment The Senior Trust Certificates will pay floating-rate coupon in arrears on a quarterly basis. The coupon is based upon 90 day cp secondary market rate, and the reference rate is reset quarterly. 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 Each underlying NT dollar asset (except two bank debentures, of which the relevant interest rate swap will be entered on or before closing by the SPT) has interest rate swap on it before entrustment. These interest rate swaps will be novated to the SPT at closing. This transaction is exposed to interest rate risk because the SPT will receive structured coupon rates including, but not limited to, 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 partly eliminated through asset specific interest rate swap on each NT dollar denominated bond. Although with interest rate swap embedded, two of the NT dollar bonds will pay fixed-rate coupon to the SPT. Therefore, such swap doesn't eliminate relevant interest rate risk for the SPT. Such risk will be mitigated by cash reserves sized under stressed interest rate assumptions commensurate with each rating level.
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. FX Swap And Forward The SPT will enter a FX swap and a forward with a five-year term. If the call option of the covered bond is exercised at the end of the fifth year from closing, the SPT can settle the FX swap and the forward to convert US dollar collections into NT dollar. If the call option is not exercised, the SPT will enter a new spot agreement to settle maturing FX swap and forward, and enter a new forward agreement which will be settled on the following callable date of the covered bond. Such hedging mechanism will be repeated every six months (which matches each callable date) after five years from closing (if necessary and feasible) until the covered bond is liquidated or repaid. On each hedging settlement date, if there is any net shortfall payable to the swap counterparty due to foreign exchange losses, the SPT can draw down the liquidity line to cover such losses to keep rolling over the hedging mechanism. The provisional collateral
with the par value of NT$7.601276 billion equivalent consists of a portfolio
of 13 NT dollar denominated bonds and debentures and one US dollar denominated
zero-coupon covered bond. 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 about 37% of total
assets or 74% of NT dollar assets.
US Dollar Covered Bond
Covered bonds: Covered bonds can most simply be viewed as the secured debt of a European lending institution. Because a covered bond is a senior secured debt obligation of an issuing bank, its holder enjoys some form of recourse to a cover pool of mortgage or public sector assets, historically of a high quality and readily available. This pool acts as collateral in case of the issuer's insolvency. DZ Bank: DZ Bank is closely integrated into the German cooperative sector and plays an important role as the larger of the two central banks of the sector, and as majority owner of the sector's strategically important product providers. At June 30, 2006, it had consolidated assets totaling ??427.4 billion. The 'AAA' rating on DZ Bank's covered bonds primarily reflect the bonds' collateral and the protections afforded by Germany's insolvency and banking laws. 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: Potential breakage cost of interest rate swap is taken into account by assuming different default timing and interest rate environment. Upward stressed interest rate curve and forward curve, together with scenario default rate for each rated tranche, are applied to size necessary cash reserves. Scenario default
rates are assumed to occur in NT dollar assets given the high rating of
the US dollar asset. Commingling Risk Set-off Risk Prior to assigning the final ratings and the closing of the transaction, Taiwan Ratings will need to receive satisfactory legal and tax opinions.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||