Chinatrust Commercial Bank CLO 2006-1 Special Purpose Trust

This report does not constitute a recommendation to buy, hold, or sell securities. The ratings also do not address the likelihood or timing of prepayment.

Rating Details

*The rating only addresses the ultimate principal repayment on or before the legal maturity date.

Profile

Trust: Chinatrust Commercial Bank Collateralized Loan Obligation 2006-1 (the Special Purpose Trust (SPT))

Expected Closing: Jan. 3, 2007

Final Legal Maturity Date: Jan. 12, 2014

Originator/Account Bank/Servicer: Chinatrust Commercial Bank (CTCB, twAA/Stable/twA-1, Standard & Poor's Ratings A-/Positive/A-2)

Trustee/Issuer: First Commercial Bank Ltd. (FCB, twAA-/Stable/twA-1, Standard & Poor's Ratings BBB+/Stable/A-2)

Arranger: CTCB

Rationale

Taiwan Ratings Corp. assigned its 'twAAA', 'twAA', 'twA', 'twBBB-', and 'twBB-p NRi' ratings to beneficial certificates of NT$5,323 million, NT$379 million, NT$1,092 million, NT$608 million, and NT$316 million, respectively, due 2014. The certificates issued by the issuer are backed by a static pool of NT dollar denominated corporate loans including bilateral and syndicated loans (the loan portfolio) originated by CTCB.

The ratings on the senior beneficial certificates of Class A, B, C, and D address the full and timely payment of interest (before deducting withholding tax) and ultimate repayment of principal on or before the final legal maturity date in January 2014. However, the rating on the mezzanine beneficial certificates of Class E addresses only the full ultimate principal repayment by the legal maturity date in January 2014. In other words, the interest on Class E certificates is not rated.
The ratings are based on the following factors:

• ?hThe credit quality of the loan portfolio;
• ?hThe credit enhancement provided through the subordination of cash flows to the respective class;
• ?hThe transaction's cash flow structure, which has been subjected to various stresses requested by Taiwan Ratings;
• ?hThe experience of the servicer in managing corporate loans;
• ?hThe legal structure of the transaction, including the bankruptcy remoteness of the SPT;
• ?hThe supporting ratings of the bank account provider and the servicer of this transaction.

Strengths, Concerns, and Mitigating Factors:

Strengths:

• The transaction's sequential payment structure ensures that the most senior rated certificates will be paid first;
• Although the last maturing loan matures in 2012, the final legal maturity of the certificates is in 2014, providing a tail period of 2 years;
• A liquidity reserve is replenished from excess interest cash flows;
• Non-amortizing credit support as the senior tranches pay down;
• The amortizing feature of the loans results in shorter weighted average loan maturity, leading to lower credit risk;
• Payment of interest from the loan portfolio on a monthly basis tends to reduce liquidity risk.

Concerns and Mitigating Factors:?h

• Industry concentration. In terms of outstanding loan balance at closing, the TFT-LCD industry will account for about 70% of the portfolio. Such concentration has, however, been taken into account by Standard & Poor's CDO Evaluator when determining the default threshold that this transaction has to withstand at various rating levels;
• Obligor concentration. In terms of outstanding loan balance at closing, the three largest obligors will account for about 62% of the portfolio. Such concentration risk has been taken into account by Standard & Poor's CDO Evaluator;
• Interest rate risk. Interest rate risk will arise from the several different interest rate indices applied to the underlying loans because the transaction will not use interest rate swaps. The interest income from the corporate loans may not be sufficient to pay senior fees and senior expenses, especially when the majority of loans have amortized. The associated risk is mitigated by: 1) stressing the interest rate indices in the cash flow modeling test; 2) matching the payment frequency between assets and liabilities; and 3) replenishing the cash reserve from excess spread to the minimum cash reserve amount.

Transaction Overview

At closing, CTCB entrusted the loan portfolio consisting of 61 NT dollar denominated bilateral and syndicated corporate loans. FCB as the trustee accepted the entrustment on behalf of the trust and issued senior beneficial certificates, mezzanine beneficial certificates, and subordinated beneficial certificates. The senior certificates are publicly placed to investors, whereas the mezzanine and subordinated certificates are privately placed.

Terms and Conditions of the Notes

Interest payment

The senior beneficial certificates have a stipulated coupon rate of 0%. The mezzanine beneficial certificates will pay fixed rate coupon in arrears on a monthly basis, which is not rated. In addition, the subordinated beneficial certificates are further divided into two classes, one of which will bear a stipulated coupon rate and the other will be entitled to residual interest collection, if any.

Principal payment

The transaction is structured as a pass-through transaction on each payment date. The principal proceeds from loan repayment, prepayment, and originator buyback will be used to repay the trust certificates as they are received by the SPT. The excess interest collection in the interest waterfall, provided that no acceleration redemption event or trust termination event occurs, will be used to pay off the subordinated certificates of Class G up to the difference between par value and purchase price at closing. Otherwise, the principal of the subordinated certificates will only be paid after senior and mezzanine certificates have been fully redeemed.

The Loan Portfolio

The collateral with a par value of NT$8.27 billion consists of a portfolio of 16 Taiwan obligors with 61 NT dollar denominated loans. The majority of the loan portfolio is syndicated, secured loans. All of the loans are senior debts with amortizing schedules and monthly interest payment frequency set before closing.

The loan portfolio covers a number of industries, including but not limited to building and development, conglomerates, electronics, telecommunications, TFT-LCD, and PCB. Obligors are highly concentrated in the TFT-LCD industry, accounting for 70% of the loan portfolio, followed by conglomerates (10%). The top three obligors, which represent 62% of the portfolio, are in the TFT-LCD industry, while the top five obligors represent 79%.

Credit and Cashflow Analysis

Since most of the obligors are not publicly rated, Taiwan Ratings has performed credit assessments on all unrated obligors in order to determine their credit quality.

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 obligor default, obligor and industry concentration, industry correlations, loan size, as well as the maturity of each loan, and computes the expected level of default that a CDO tranche must be able to withstand at a given rating level.

In addition, to verify that ultimate repayment of principal on the senior and mezzanine certificates can be met, Taiwan Ratings has performed cash flow analysis under a variety of stress scenarios.
The following elements were taken into account in the cash flow modeling to capture the specifics of the transaction:

• Moderate recovery rates were assumed for corporate loans. Recovery rates were reviewed and adjusted by Taiwan Ratings case by case mainly based upon the type and value of collateral and the recovery experience of the originator. Recoveries were modeled with adequate time for workout after default.
• Various default patterns were applied in order to address obligor concentration risk, obligor credit risk, and yield sufficiency.
• Downward stressed interest rate scenario on the corporate loans, along with scenario default rate for each rated tranche, is applied to size necessary credit enhancement.

Structural Analysis

Commingling risk
The servicer's commingling risk is limited, as the servicer is required to deposit the collections in designated trust accounts within two business days of receipt. In addition, a servicer termination event will be triggered upon the downgrade of the servicer's rating to 'twA' or below.
The commingling risk with regard to security agent banks for syndicated loans is also limited to the extent that most of them are highly rated and the amount of exposure is small compared with the transaction's rating.

Set-off risk
The originator's agreement to deposit the set-off amount, which is claimed by obligors against either the SPT or the originator, in the trust account within two business days after notice mitigates obligor set-off risk. Therefore, the mitigation for set-off risk will be measured by the originator's ability to pay the set-off amount. Since certificate holders will be relying on the originator to mitigate this risk, the ratings of outstanding tranches will be capped by the originator's rating after it is downgraded to a certain rating level.

Prepayment risk
Obligors are allowed to prepay according to individual loan agreements. If the principal portion of prepayment exceeds NT$10 million, the trustee is required to pass it through the principal waterfall to certificate holders four business days after receipt or on the next trust payment date, whichever is earlier. The interest portion will be distributed later on the next trust payment date. Therefore, the negative carry risk arising from loan prepayment is very limited due to the NT$10 million threshold and the frequency of the trust payments.

Liquidity risk
The liquidity risk for taxes, senior fees, and senior expenses is limited due to the amortizing feature of corporate loans, the payment frequency match between liabilities and assets, and the adequately sized minimum cash reserve to be replenished from excess spread.

Servicing transition risk
A backup servicer mechanism does not exist in the transaction. The trustee will have a 30-day period to appoint a replacement servicer after the servicer termination event happens. In the event that a replacement servicer is not found, the trustee will need to take over the role. The risk is mitigated by the cash reserve to be replenished from excess spread after closing.

Further funding obligation
In a few of the syndicated loan agreements, all the syndicated banks are obligated to make further funding to the relevant obligors if more than 50% of the syndicated banks agree to increase the commitment amount. Although the drawdown period of these agreements has past, since the originator will transfer both rights and obligations under the relevant loan agreements to the SPT at closing, the SPT may be required to make further funding to the relevant obligors if a majority of banks votes in favor.
However, the risk relating to further funding obligation is remote because: 1) the originator has agreed to undertake the funding obligations by using its own funds under the originator's name to fund the relevant obligors; and 2) there is an indemnity clause in the trust agreement to the effect that the originator will indemnify the trustee if it fails to perform the funding obligations.

Distribution of payments among different facilities
At closing, the originator will transfer certain but not all facilities under a syndicated loan agreement to the SPT. Some loan agreements do provide that any payment should be distributed to all lenders in proportion to their outstanding amount, but they do not provide that the "pro rata" principle should also be used among different facilities. Therefore, certificate holders are exposed to the risk that loans being transferred happen to be in a facility that is not paid first by the facility bank, which has the discretion to decide the payment distribution among facilities when the sums received are insufficient to pay all due in all facilities under the same loan agreement.
Under the abovementioned circumstances, the loans will default and all the principal repayments will be viewed as recovery to the defaulted loans. At that time, the recovery assumption will be reviewed again to assess if rating action needs to be taken.

Legal and Tax Analysis

Prior to assigning the final ratings and the closing of the transaction, Taiwan Ratings has received satisfactory legal and tax opinions.

Surveillance

After the closing date, continuous surveillance will be maintained on the transaction until all rated beneficial certificates have been fully redeemed. The loan portfolio's credit quality as well as all supporting ratings will be monitored to make sure that the ratings on the certificates reflect the credit risk undertaken by investors.