This report does not constitute a recommendation to buy, hold, or sell securities.
Trust: President
Securities Corporation Collateralized Bond Obligation (President Securities
CBO) 2006-1 (the Special Purpose Trust (SPT)) Final Legal Maturity Date: October 3, 2011 Originator: President Securities Corp. (President Securities, National Scale Ratings twA-/stable/twA-2) Trustee/Issuer: First Commercial Bank Ltd. (FCB, Global Scale Ratings BBB+/Stable/A-2, National Scale Ratings twAA-/Stable/twA-1) Transaction Administrator/Account Bank/ Swap counterparty: The Hong Kong and Shanghai Banking Corp. Ltd., Taipei Branch (HSBC Taipei, HSBC Global Scale Ratings AA/stable/A-1+) Liquidity Facility Provider: Taiwan Shin Kong Commercial Bank (Shin Kong Bank, National Scale Ratings twA+/Stable/twA-1) Arrangers: HSBC Taipei and President Securities The two tranches of certificates issued by the issuer are 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 on October 3, 2011. The ratings are based on the following factors:
Strengths, Concerns, and Mitigating Factors: Strengths:
Concerns and Mitigating Factors:
At closing, the Originator transferred 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 issued 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 were sold to investors. Part of the proceeds raised from investors were converted into US dollars with the swap counterparty. Some of the proceeds were kept by the SPT as cash reserves. The US dollar proceeds, together with the remaining NT dollar proceeds, were 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 has 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 has 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 Principal payment Interest Rate
Swaps 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 is mitigated by cash reserves sized under
stressed interest rate assumptions commensurate with each rating level.
In summary, interest rate risk arising from NT dollar assets is mitigated by interest rate swaps and cash reserves sized under stressed interest rate assumptions commensurate with each rating level. Should interest rates fluctuate beyond the stressed interest rate assumptions, cash reserves may not be sufficient to support a given rating tranche and the ratings of this transaction will have to be reevaluated. FX Swap And Forward
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:
NT Dollar Assets 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 reflects 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. Given the uncertainty of when the US dollar is called and the rolling spot/forward mechanism, TRC did not make any assumption regarding principal repayment or the market value upon the liquidation of the US asset. As long as the actual default rate does not exceed the scenario default rate required for each rated tranche, the principal collection of performing NT dollar bonds or the assumed recovery from defaulted NT dollar bonds should be sufficient to repay the principal of the rated tranches. Commingling Risk Set-off Risk Legal and Tax Analysis
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