Presale: CMO AR Securitization

This presale report is based on information as of October 5, 2006. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of a final rating that differs from the preliminary rating.

NT$10 billion ABCP* Notes

Profile

Issuer: Chinatrust Commercial Bank (Chinatrust Bank, Global Scale Ratings A-/Positive/A-2, National Scale Ratings twAA/Stable/twA-1) as trustee for CMO AR Securitization (SPT)

Expected closing date: October 2006

Trustee/Back-up Servicer: Chinatrust Bank

Seller/Servicer: Chi Mei Optoelectronics Corp. (CMO, National Scale Ratings twA-/Stable/twA-2)

FX Hedge Providers: Industrial Bank of Taiwan (National Scale Ratings twA/Stable/twA-2), Land Bank of Taiwan (Land Bank, Global Scale Ratings A/Stable/A-1, National Scale Ratings twAA+/Stable/twA-1), Chinatrust Bank

Account Bank: Chinatrust Bank

Committed CP Underwriters: China Bills Finance Corp., International Bills Finance Corp., Mega Bills Finance Corp. (National Scale Ratings twAA/Stable/twA-1), Taiwan Cooperative Bank Ltd. (Global Scale Ratings BBB+/Stable/A-2, National Scale Ratings twAA/Stable/twA-1), Bank of Taiwan (Global Scale Ratings A+/Stable/A-1, National Scale Ratings twAAA/Stable/twA-1), Land Bank, and Chinatrust Bills Finance Corp.

Liquidity Facility Providers: Bank of Taiwan, Land Bank, First Commercial Bank Ltd. (Global Scale Ratings BBB+/Stable/A-2, National Scale Ratings twAA-/Stable/twA-1), Chang Hwa Commercial Bank Ltd., Hua Nan Commercial Bank Ltd. (National Scale Ratings twAA-/Stable/twA-1), Bank Sinopac (Global Scale Ratings BBB/Stable/A-2, National Scale Ratings twA+/Stable/twA-1)

Arrangers: Industrial Bank of Taiwan, ABN Amro Bank (Global Scale Ratings AA-/Stable/A-1+), Taipei Branch, and Hong Kong and Shanghai Banking Corp., Ltd. (Global Scale Ratings AA/Stable/A-1+), Taipei Branch

Rationale

The ABCP Notes to be issued by the SPT will be backed by a revolving portfolio of New Taiwan dollar (NTD) and/or US dollar (USD) and/or Japanese Yen (JPY) denominated trade receivables originated by CMO. The receivables trustee, Chinatrust Bank, will issue discounted Notes with a typical tenor of one month.

The preliminary rating on the Notes, to be purchased by the Committed CP Underwriters, reflects the following:

• The dynamic resetting mechanism for credit enhancement based on portfolio performance. The credit enhancement is sufficient to mitigate credit risks associated with the trade receivables;
• The liquidity facilities, which will fund any shortfalls other than shortfalls that arise due to obligor default, are subject to liquidity funding tests. Regarding other risks, the Liquidity Facility Providers will take on commingling risk, obligor set-off risks, servicer transition risk, receivables dilution risk, default risk of the Committed CP Underwriters, f/x swap counterparty default risk, and f/x risk. In the case of dilution risk, IBT as arranger has structured the deal by adding a certain level of extra credit enhancement to reduce the exposure of the Liquidity Facility Providers;
• The requirement for ongoing periodic servicer audits and eligibility audits;
• The ratings of rating dependency, including the Liquidity Facility Providers, eligible investments, the bank account providers, and Samsung Electronics Co. Ltd. (Global Scale Ratings A/Stable/A-1) as top obligor; and
• The contract with the Trustee as the Back-up Servicer.

Transaction Overview

The receivables trustee, Chinatrust Bank, will establish a new SPT to purchase a revolving portfolio of trade receivables from eligible obligors over a four-year period from CMO. The transfer covers all receivables arising from designated eligible obligors. Those receivables that are ineligible will be funded by way of seller trust certificates. The trustee will fund the eligible receivables mainly by issuing NTD denominated senior certificates (preliminarily rated twA-2) in the form of short-term Notes to the Committed CP Underwriters under a CP purchase commitment agreement. The Committed CP Underwriters will either hold or sell the short-term Notes.

The portfolio will be serviced by the originator, CMO, until a servicer termination event occurs, whereupon the initial Servicer will be replaced by Chinatrust Bank as Back-up Servicer. The quality of the servicer will be monitored through servicer audits, which will be conducted at least on a semi-annual basis.

This transaction will be supported by liquidity facilities totaling NT$10 billion, which may be drawn down in either NTD, USD, or JPY. Under the terms of the liquidity agreement, the Liquidity Facility Providers will fund any shortfall except those caused by obligor defaults. The liquidity facilities, which are subject to a funding formula, will absorb all the risks associated with this transaction except obligor defaults. In other words, the Liquidity Facility Providers will absorb various risks such as commingling, dilution, servicer transition, and also foreign exchange losses that may arise due to the variance in foreign exchange rates between the time when the credit enhancement is sized and the time of actual obligor default which exceeds the subordinated tranche. The transaction has certain structural elements which are intended to provide partial mitigation for some of these risks for the benefit of the Liquidity Facility Providers; in particular, the dilution reserve proposed by IBT as arranger.

In addition to investor trust certificates, the SPT will issue subordinated certificates and seller certificates. The seller certificates fund ineligible receivables and eligible receivables not taken into account in the borrowing base which back the rated short-term Notes.

The transactions have a revolving period, a wind-down period, and a period after the occurrence of a Notes Stop Issuance trigger.

• During the revolving period, the SPT, subject to certain conditions set down in the transaction documents, will continue to purchase receivables at par from CMO.
• Upon the earlier occurrence of any wind-down event or four years from closing, the program will enter into a wind-down period, during which no further receivables may be purchased. Collections from the existing receivable portfolio will be used to retire outstanding short-term Notes.
• When a Notes Stop Issuance event occurs, the SPT will cease to issue new short-term Notes and all outstanding short-term Notes will be repaid in full (except in the event of payment default on the short term notes) from drawdown against the liquidity facilities.

Seller/Servicer

CMO is the world's fourth largest thin film transistor-liquid crystal display (TFT-LCD) panel maker. CMO's revenue has grown exponentially since its establishment, thanks to the company's aggressive capacity expansion together with rapid industry growth, underpinned by robust demand for notebook personal computers, TFT-LCD monitors, and flat panel televisions.

Credit control is mainly driven by the company's sales department. This is quite common and deemed efficient in a fast growing company, as sales people are more sensitive to what is going on in the market. To enhance its credit control, CMO implemented a new credit policy in November 2005. More quantitative and qualitative factors have been incorporated into the new policy. However, its impact is difficult to measure as no bad receivables were written previously.

In terms of delinquency management, CMO carries out a review at least once every month. If a delinquency occurs, the company's IT system will automatically notify the relevant sales person.

Liquidity Banks

The Liquidity Facility Providers will provide liquidity funding for the transaction severally. Under the liquidity agreement, the trustee would make prorated draws on the liquidity lines.

There are two back-up Liquidity Facility Providers contracted in this transaction to reduce rating transition risk arising from a downgrade of the Liquidity Facility Providers. Should the rating of the Liquidity Facility Providers be downgraded and in turn negatively affect the rating of CP, the downgraded Liquidity Facility Provider will be replaced with the back-up Liquidity Facility Provider(s).

Collateral

Each receivable must meet Eligible Country, Eligible Customer, Eligible Products, and Eligible Receivables criteria in order to be considered part of the borrowing base. Receivables could be denominated in NTD, USD, or JPY. The maximum contractual payment term of any receivable may not exceed six months, and, in particular, the weighted average payment terms must be kept no more than 90 days.

Based upon receivable pool data since 2003, USD receivables accounted for more than 97% of total receivables, while NTD and JPY receivables made up the balance. Weighted average payment terms ranged from 60 days to 90 days.

According to the same historical pool data, dilution risk has been much higher than receivable default risk. The dilution risk heightened in the second half of 2004, as evidenced by a rapidly rising dilution ratio (defined as dilution amount divided by monthly credit sales) that peaked at about 7% (depending upon the assumption of dilution horizon). High dilution risk mainly resulted from the industry's highly volatile pricing.

Credit Support

Taiwan Ratings Corp. applied Standard & Poor's sales-based approach to trade receivable criteria. Under this method, credit loss is sized on a dynamic basis but is subject to a floor reserve amount. In a sales-based approach, credit enhancement is based on arrears as proxy delinquency, and the methodology uses a time-matched principle, so that defaults or dilutions incurred can be traced back to previously originated sales. In this way, the analysis is not skewed by seasonal factors.

Loss and dilution reserves will be at least equal to the reserve floor. This is meant to mitigate obligor concentration risk if credit enhancement sized based upon the dynamic approach is less than credit enhancement determined by the reserve floor. With the exception of the receivables from the group of Samsung Electronics Co. Ltd. (Samsung; Samsung Electronics Co. Ltd.: Global Scale Ratings A/Stable/A-1) or related entities (collectively "Samsung"), the loss reserve floor is sufficient to withstand the receivable loss from either the largest twA-1 rated obligor (group), the two largest twA-2 rated obligors (groups), the three largest twA-3 rated obligors (groups), or the five largest obligors (groups) that don't fall into the three foregoing categories.

The maximum concentration limit proposed by IBT for Samsung is 30%. Should receivables from Samsung exceed the reserve floor, the CP would default upon the insolvency of Samsung. However, instead of a sudden default, if Samsung is downgraded to A-3 or below, associated receivables would be capped by the foregoing concentration limit. In turn, if credit enhancement of the new CP to be issued after Samsung's downgrade can be sufficiently reserved, the CP's rating would be no longer directly linked to that of Samsung.

Structural Analysis

Funding reserves
The funding reserves are sized by stressing reference rate reset risk and the period that the receivables remains outstanding to ensure that all costs of the deals, including interest expenses and funding costs, can be met.

Account payable set-off risk
Some of CMO's clients are also CMO's suppliers. This leads to opportunities for offsetting trade payables against trade receivables. In the case of CMO, accounts payable are netted off against the eligible receivables. To protect the investor during the wind-down period, an accounts payable reserve is sized based on historical data to quantify the magnitude of set-off.

Dilution risk
Dilution routinely arises in companies and may be due to product returns or reduced pricing or claims under warranties. Evidenced by historical data, dilution risk is much higher than credit risk in this transaction. Dilution risk is ultimately mitigated by the liquidity facility. However, additional reserves have been proposed by IBT to reduce the Liquidity Facility Providers' exposure in a worst case scenario.

Foreign exchange risk
The trade receivables are denominated in either NTD, USD, or JPY, and the senior certificates are denominated in NTD. To mitigate currency risk, the SPT will enter into spot forward contracts which match the maturity and notional principal amount of the short-term Notes issued to finance non-NTD receivables. However, FX volatility may lead to higher losses as the portfolio of receivables will not be fully hedged into NTD and higher losses could be incurred when non-NTD losses (which exceeds non-NTD subordinated tranches) are translated into NTD. This risk has been taken into account in the write-off mechanism and ultimately absorbed by the liquidity facility.

Servicing risk
CMO will act as the initial Servicer for the underlying portfolio. Upon the occurrence of certain events, the Trustee will replace CMO as the Servicer for the transaction. Cash reserves will be fully funded at closing to mitigate potential servicer transition risk.

Commingling risk
After closing, if CMO is rated no lower than twA-2, all receivable payments will go into the collection accounts in the name of CMO in the account bank. CMO is obligated to remit all collections to the trust account within three Taipei business days from receipt. In the event that CMO is downgraded below twA-2, CMO is obligated to remit all collections at hand within one Taipei business day from such a downgrade and send out notice to obligors within three Taipei business days from such a downgrade to redirect obligors' payments into the trust accounts. Commingling risk is also mitigated by the liquidity facility.

Liquidity/short-term note rollover risk
There are two sources of liquidity in this transaction. The Committed CP Underwriters have committed to a five-year agreement to purchase all the short-term Notes issued by the SPT.

The liquidity facilities can be drawn down subject to meeting liquidity drawdown tests. Liquidity is available in either NTD, USD, or JPY in same day funds in order to ensure that the spot forward contracts are settled properly, to fund any cash shortfalls (other than those due to obligor defaults), and also to ensure the full repayment of any outstanding short-term Notes upon most of the Notes Stop Issuance events.

Notes Stop Issuance events include, but are not limited to, payment default on the short-term Notes, termination of the liquidity facilities without replacement, termination of the spot forward agreements, downgrade of the rating on the short-term notes to twB or lower, liquidity facilities insufficient to retire all the outstanding short-term notes, illegality, and bankruptcy of the trustee.

Sovereign risk
Foreign obligors' payment capability could be negatively affected by foreign exchange controls. This risk is mitigated through eligibility criteria in respect of eligible countries and the loss reserve floor.

Legal and Tax Analysis

The deal's legal counsel will request law firms in each jurisdiction where the obligors of receivables are domiciled to issue foreign legal opinions. Then, based upon those legal opinions and other typically required documents, the deal's legal counsel will issue its closing legal opinion.

Foreign legal opinions will address the following legal issues in respect of foreign obligors:

• Incorporation of foreign obligors under each corresponding jurisdiction;
• Whether or not the receivables according to purchase order, invoice, and other relevant documents constitute a legal, valid, binding payment obligation, to and are enforceable against corresponding obligors under each corresponding jurisdiction;
• Perfection of receivable transfer.

In terms of potential withholding tax on payment from offshore obligors to the Taiwan-based SPT, the receivables which are subject to withholding taxes will be excluded by eligibility criteria.

Taiwan Ratings Corp. expects to obtain legal and tax opinions prior to closing that will be satisfactory in form and substance.