Presale: Standard Bank 2006-1 CBO Special Purpose Trust

This presale report is based on information as of Jan. 29, 2007. 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.

Rating Details

*The rating on each class of certificate is preliminary and subject to change at any time.
**The 'p NRi' subscript indicates that the rating addresses the principal but not the interest portion of the obligation. For a detailed qualifier definition, please visit Taiwan Ratings' website at www.taiwanratings.com.

Profile

Issuer: Land Bank of Taiwan (Land Bank, twAA+/Stable/twA-1) acting as trustee for Standard Bank 2006-1 CBO Special Purpose Trust (the SPT).
Expected Closing Date: Feb. 6, 2007
Final Legal Maturity Date: December 2017
Trustor/Seller: Standard Bank of South Africa Ltd., Taipei Branch (Standard Bank, Rated BBBpi by Standard & Poor's Ratings Services)
Trustee/Servicer: Land Bank
Issue: NT$8.1 billion trust beneficial certificates due in 2017
Rating Dependents: Account Bank, Hedge counterparty (including the Cross Currency SWAP (CCS) and Interest Rate SWAP (IRS) counterparties).

Rationale

Taiwan Ratings Corp. assigns its 'twAA-', 'twAA-', 'twAA-p NRi','twA-p NRi','twBBB+p NRi', 'twBBBp NRi', and 'twBBB-p NRi' preliminary ratings to NT$2,950 million, NT$2,000 million, NT$1,000 million, NT$995.75 million, NT$749.25 million, NT$176.58 million, and NT$228.42 million trust beneficial certificates, respectively, issued by Land Bank, the trustee. The preliminary ratings address the timely payment of rated interest and full ultimate repayment of principal on or before the trust certificates' legal maturity date in 2017. The qualifiers for the ratings on Class A-3, Class B, Class C, Class D, and Class E indicate that only the principal but not the interest portions are rated.

The ratings reflect:

• The credit quality of the portfolio;
• The level of credit support for each class of trust certificates (Class A-1, A-2, and A-3 belong to the same class) provided by subordinating classes;
• The establishment of a cash liquidity reserve at closing;
• Satisfactory cash flow runs for each class proving the structure's ability to achieve timely payment of rated interest and ultimate repayment of principal by the final legal maturity date;
• The existence of a set of trigger mechanisms;
• The ratings on the supporting parties;
• The CCS and IRS, which appropriately hedge the basis and/or foreign exchange risk; and
• The bankruptcy remoteness of the SPT.

Strengths, Concerns, and Mitigating Factors

Strengths:

• The transaction's sequential-pay structure ensures that the most senior certificates will be repaid in full before any proceeds may be used to redeem the subordinating certificates;
• A tail period between the last maturity date of the bond portfolio (the expected maturity day) and the final legal maturity date of the certificates ensures sufficient time to work out defaulted bonds;
• Excess spread will either be trapped in the liquidity reserve account or the collection account to provide extra credit enhancement; and
• Non-amortizing credit support results in increasing amounts of credit support as more senior classes are paid down.

Concerns:

• Concentration of pool assets among several issuers and industries;
• Relatively low pool yield; and
• The deferrable feature with respect to both interest and principal payments of a New Taiwan dollar (NTD) debenture in the bond portfolio. The deferral will be imposed if the issuer's Capital dequacy Ratio drops below a certain percentage.

Mitigating Factors:

• Standard & Poor's CDO EvaluatorTM takes the concentration issue into consideration when performing portfolio credit sizing;
• A cash liquidity reserve will be set aside at closing to compensate for the insufficient yield. With the exception of the Class A-1 and A-2 certificates, the interest portions of the certificates are not rated. Failure to pay such interest will NOT constitute an Event of Default of both the certificate(s) and the SPT. Taiwan Ratings has also performed various cash flow tests to ensure the sufficiency of the reserve and pool yield.
• The existence of a 5-year tail period between the expected maturity date and final legal maturity date partly offsets the potential principal deferral risk. The deferral risk of the debenture interest, on the other hand, will be covered by the IRS. Taiwan Ratings has embedded the principal deferral scenario into its cash flow tests.

Transaction Overview

At closing, Standard Bank will entrust the bond portfolio consisting of 14 NT dollar denominated bonds and 1 US dollar (USD) denominated note (together, the bond portfolio) to the SPT. Upon receiving such entrustment, Land Bank shall in turn issue 7 classes of trust beneficial certificates, which will be publicly placed to investors. The issuance proceeds, after exchanging a portion of it into USD through the CCS, will be paid to the seller, Standard Bank. The trustee will enter into an IRS and a CCS to hedge the basis and foreign exchange risks. The transaction is structured as below:

Terms and Conditions of the Certificates

The trust beneficial certificates will receive fixed or floating rate coupon payments as specified on the indenture. Except for the first payment, all interest payments will be made on an annual basis. Nevertheless, at the scheduled redemption date (the interim payment day) of any bond in the asset pool, both interest and principal collections there-from will be passed-through to investors within 4 business days. The cash liquidity reserve will initially be used to cover the shortage of the interest waterfall down to the rated interest payments. If there is any remaining shortage, the principal collection will then be used.

Taiwan Ratings would like to draw investors' attention to the terms regarding interest payments of all trust beneficial certificates. The interest portions of Class A-3, Class B, Class C, Class D, and Class E are not rated. However, under the assumption that the principal payment is not deferred on the deferrable debenture, the probability of Class A-3 to make timely interest payment is commensurate with Taiwan Ratings' 'twAA-' rating scale. Failure to make timely payment of any non-rated interest by the SPT will not constitute a Certificate Event of Default and will not trigger an SPT termination event. Unpaid interest will be accrued but not compounded and will be repaid on (a) subsequent payment date(s) when sufficient interest collections are available. Interest payments, including those for accrued-unpaid portions of higher-ranked tranches, will enjoy higher priority over those of lower-ranked tranches.

Article 41 of the Financial Asset Securitization Law stipulates that income from trust property, after deducting costs and necessary expenses, belongs to the beneficiaries. The interest distribution, however, will be subject to withholding tax at the rate stipulated by the tax authority. Consequently, interest received by certificate holders will be net of tax withheld.

The principal payment will be made on a sequential basis both on the regular and interim payment dates.

The Bond Portfolio

The asset pool for this transaction will be static, i.e. neither can the seller entrust new bonds to the SPT nor can any third party substitute any existing bonds after the closing date. As of the expected closing date, 15 bonds will be included in the portfolio. About 36% of the pool balance will be composed of NTD structured notes, 25% will be a non-deferrable bank debenture, 27% will be a deferrable debenture, and 12% will be a USD note.

Over 86% of the bond portfolio is concentrated in the financial services industry, of which 86% is in Taiwan and 14% is in Europe. About 73% of the total pool balance is concentrated on four obligors, with the remaining obligors each accounting for less than 5% of the total pool size. The pool's post-hedge weighted average yield is about 1.4% and its weighted average maturity is about 4.2 years at closing day.

If the Capital Adequacy Ratio of the issuer of one NTD debenture in the bond portfolio drops below a certain percentage, the issuer will be prohibited from paying any interest or principal until the issuer's Capital Adequacy Ratio is restored.

The USD note is expected to be issued under a Euro Medium Term Note Programme. The note will receive fixed coupons for the first 2 years after issuance date. Beginning at year 3, the interest portion will be linked to Constant Maturity Swap rate (CMS) and will be reset at the beginning of each annual interest period following a pre-specified formula. The note is expected to be fully redeemed at par in December 2012 and to be issued by an obligor rated 'AA-' by Standard & Poor's Ratings Services.

All the abovementioned features have been incorporated into Taiwan Ratings' credit analysis.

Liquidity Cash Reserve

A cash reserve will be fully funded at closing to mitigate the potential liquidity risk of the transaction. Throughout the transaction life, the reserve could also be used to settle the IRS. However, any remaining un-used reserve will be retained in the reserve account until the arrival of trust termination date or final legal maturity date, at which time it will be pooled into the liquidation waterfall.

Hedging

The transaction will initially incur interest rate and currency mismatch between the asset and liability sides of the SPT. The trustee will enter into an IRS and a CCS to hedge such risks. The Hedge counterparty (-ies) must maintain a commensurate credit quality during the duration of the hedging contracts. The SWAP counterparty will be obligated to take certain pre-specified actions if its credit quality deteriorates to a pre-determined level. Taiwan Ratings will review all hedge documents to make sure they comply with such requirements. The legal council must also address the enforceability of the hedge agreements.

Credit and Cash Flow Analysis

Taiwan Ratings relies on the rating of each bond issuer to perform the credit sizing of the transaction. The majority of the underlying asset issuers/guarantors are rated by Taiwan Ratings and/or Standard and Poor's. Taiwan Ratings has performed credit assessment on those un-rated obligors. The ratings along with obligor and industry information, size, and maturities are then incorporated into Standard & Poor's CDO Evaluator to determine the default risk of the bond portfolio.

The CDO Evaluator is an integral part of Taiwan Ratings' methodology for rating and monitoring CDO transactions. Through a Monte Carlo simulation, the CDO Evaluator assesses the credit quality of a portfolio, taking into consideration the credit rating, size, and maturity of each asset; the correlation between each pair of assets; and the bivariate emerging market risk, if any. The credit quality of the portfolio is presented in terms of a probability distribution for potential default rates. From this probability distribution, the CDO Evaluator derives a set of scenario default rates (SDRs), each of which identifies the minimum level of portfolio defaults each CDO tranche must withstand to support the requested rating level.

Benchmark statistics from CDO EvaluatorTM can be found in the table below.

S&P Default Measure (DM)
DM describes the annualized weighted average portfolio default rate. DM is computed by taking the average default probability of the assets, weighted by the principal balance, and then annualized by finding the constant annual default rate that gives the weighted average default probability over the weighted average maturity of the portfolio. Unlike other measures of average default in use, DM encompasses all assets in the portfolio, including defaulted securities and cash, and it reflects the actual maturity of the assets.

S&P Variability Measure (VM)
VM describes the annualized standard deviation of portfolio default rates. VM is the degree of variability of the portfolio default rate around its expected value. VM incorporates the effects of the relative concentration of the assets in the portfolio and the correlation between these assets. It reflects the effective diversity of the portfolio in a manner directly applicable to estimating the probability of different default rates.

S&P Correlation Measure (CM)
CM is the ratio of the standard deviation of portfolio default rates computed with correlation, divided by the standard deviation computed assuming no correlation. It measures the effect of correlation on the standard deviation in default rates. For example, if CM equals 1.3, the standard deviation of default rates is 30% greater due to correlation.

Taiwan Ratings has performed cash flow analysis under various stress scenarios for each class of trust certificates to verify the transaction's ability to withstand the default rates from the credit analysis abovementioned under the premise that prompt interest payments for Class A-1 and A-2 certificates and ultimate principal repayments of all classes of certificates can be achieved.

Structural Analysis

Commingling Risk
Commingling risk is fairly remote with this transaction given the direct remittance of most payments from the asset pool to the trust accounts. The trustee will be responsible for defaulted bonds' workout and will deposit any recovery proceeds there-from directly into the trust accounts.

Obligor Set-off Risk
Set-off risk is very remote with this transaction. The seller will issue a warrant to certify that, as of the notification and closing days, all issuers included in the bond portfolio have no demand deposits with it. In addition, as of the same dates, the seller has not issued any debt-like security to the bond issuers. As such, the most-likely sources of set-off rights to the obligors will be distinguished.

Prepayment Risk
All bonds are non-prepayable and hence prepayment risk is deemed fairly limited with this transaction.

Negative Carry Risk
Negative carry risk is fairly remote with this transaction considering its pass-through redemption mechanism and the liquidity reserve set aside at closing.

Liquidity Risk
Interest from all assets will be collected before each regular payment date. The deferrable feature of one debenture will render the investor with liquidity risk. However, this risk has been partly hedged by the IRS abovementioned. In addition, the pool's yield is relatively tight. When underlying bonds are in arrears or default, it is likely that interest collection will not be sufficient to fulfill the SPT's obligations for all periods. As a result, a cash reserve will be set aside at closing to cover the potential shortage at each payment day.

Legal and Tax Analysis

The transaction will be structured in accordance with the Financial Asset Securitization Law of Taiwan, which provides for the establishment of the SPT, the perfected transfer of assets from the originator to the SPT, and protection from other creditors' and third parties' claims. Taiwan Ratings will need to receive satisfactory legal and tax opinions prior to the closing of the transaction.