Cathay United Bank Cash Flow Balance Sheet CLO 2007-1 Special Purpose Trust

This report is based on information as of May 28, 2007. This report does not constitute a recommendation to buy, hold, or sell securities.

Rating Details:

Profile:

Issuer: Land Bank of Taiwan (Land Bank, twAA+/Stable/twA-1) in its capacity as trustee for Cathay United Bank Cash Flow Balance Sheet Collateralized Loan Obligation (CLO) 2007-1 Special Purpose Trust (the SPT).

Cut-Off Date: May 11, 2007

Closing Date: May 28, 2007

Final Legal Maturity Date: May 2014

Originator/Servicer: Cathay United Bank Company Limited (CUB, twAAA/Stable/twA-1)

Trustee/Back-up Servicer: Land Bank

Hedge Counterparty: CUB

Arranger: Industrial Bank of Taiwan (IBT, twA/Stable/twA-2)

Issue: NT$5.4 billion trust beneficial certificates due in 2014

Rating Dependents: Account Bank, Eligible Investment

Rationale

Taiwan Ratings Corp. assigns its 'twAAA', 'twAA', 'twA', and 'twBBB' ratings to NT$3,335 million, NT$315 million, NT$340 million, and NT$480 million trust beneficial certificates issued through Cathay United Bank Cash Flow Balance Sheet CLO 2007-1 Special Purpose Trust (the SPT). The ratings address the probability of timely payment of interests at each payment date as well as full and ultimate payment of principals on or before the final legal maturity date toward senior trust beneficial certificates. This is the first balance sheet CLO deal originated by CUB and the third balance sheet CLO deal in Taiwan.

The ratings reflect:" The credit quality of the portfolio;

• The pledged collaterals and/or claims against collateral liquidation proceeds;
• The level of credit support for each class of trust certificates provided by subordinating classes;
• The cash liquidity reserve that has been fully set-aside at closing;
• The hedge mechanism;
• Satisfactory cash flow test results;
• The existence of a set of trigger mechanisms;
• The ratings on the supporting parties;
• The bankruptcy remoteness of the SPT; and
• Satisfactory legal and tax opinions.

Strengths, Concerns, and Mitigating Factors:

Strengths:

• Relatively fast pool amortization speed, along with the transaction's sequential-pay structure result in increasing amounts of credit support following the redemption of senior classes;
• Additional liquidity support toward senior fees and interests provided by principal waterfall;
• The liquidity reserve will be maintained at the minimum required level before any proceeds can be distributed to junior classes;
• An acceleration mechanism enables the SPT to redeem senior notes with excess spreads from interest waterfall upon deterioration of pool credit quality; and
• An appropriate tail period ensuring sufficient time to work out defaulted loans.

Concerns:

• Relatively severe concentration of the pool both in terms of obligor and industry;
• Mismatch between asset yield and liability coupon;
• Limited control over restructure of syndication loans and the corresponding collateral;
• Prepayment options granted to borrowers (by loan contract or by law);
• Potential liquidity risk during the transition period of service provider(s); and
• Set-off options retained by the borrowers under Taiwan's civil code.

Mitigating Factors:

• Standard & Poor's Ratings Services' CDO Evaluator, which facilitates Taiwan Ratings' credit sizing, takes the concentration issue into account;
• An Interest Rate SWAP (IRS) has been entered into at closing to address the mismatch;
• Modification mechanisms concerning maturity dates, principal payment, and interest payments under the syndication transaction documents have undergone a thorough due diligence by both the accountants and the legal counsels. Transaction documents for the very deal have also imposed certain limitations on such modification. Relevant parties will notify Taiwan Ratings upon changes of any terms and conditions concerning the underlying loans and Taiwan Ratings will reflect its impact promptly on the then current rating(s).
• The aforementioned IRS will cover the potential liquidity risk arising from prepayment until the proceeds there-from has been distributed to certificate holders;
• A cash liquidity reserve has been fully set aside at closing to mitigate potential liquidity risks; and
• A mechanism embedded into the transaction obliges the originator to provide a cash reserve upon the downgrading of its rating to certain preset level(s) to address such potential set-off risk.

Transaction Overview

The transaction process for the deal is similar to most existing CLO deals. The deal adopts true sale structure and use a Special Purpose Trust (SPT) as the intermediate entity. The SPT complies with TRC's Special Purpose Vehicle criteria.

The transaction began with the implementation of necessary procedures for the purpose of perfecting the asset transfer. At closing, CUB entrusted a portfolio of loans along with all rights under them to the SPT. Upon receiving such entrustment for the SPT, Land Bank, the trustee, issued seven classes of trust beneficial certificates, of which the four senior classes have been publicly placed to investors. Proceeds from the issuance and/or the junior certificates have been paid to the originator to settle the asset entrustment.

The transaction initially incurred interest rate and timing mismatch. The trustee has entered into an IRS to hedge such risks. The Hedge counterparty, CUB, must maintain a commensurate credit quality throughout the life of the transaction or it is obligated to find a qualified successor to takeover its obligations under the IRS. Taiwan Ratings has reviewed all hedge documents to make sure they comply with such requirements. The legal counsel has also addressed the enforceability of the hedge agreements.

The asset pool for this transaction is static. Both borrowers and agent banks (in the case of syndication loans) have been notified and required to make future payments directly into trust accounts therefrom. The trustee acts as back-up servicer for this deal. A cash reserve has been set-aside at closing. The diagram below outlines the transaction structure:

Terms and Conditions of the Certificates

The senior trust beneficial certificates will receive fixed coupon payments as specified on the indenture. All payments, including those of interest and the principal, are on a monthly basis. Both interest and principal distribution must follow the waterfall specified on the transaction documents. Principal waterfall is sequential and pass-through.

Trustee can draw down the cash liquidity reserve to cover the shortage of the interest waterfall down to all rated interest payments (the limited shortage). The principal collection will cover any remaining limited shortage on a temporary basis.

Failure to make timely payment to any class other than the most senior will not constitute a securitization Event of Default and will not trigger a SPT termination event. Unpaid interest will be accrued but not compounded and will be repaid on (a) subsequent payment date(s).

Article 41 of the Financial Asset Securitization Law stipulates that incomes from trust property, after deducting costs and necessary expenses, belong 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 Loan Portfolio

In contrast to primary CLO, for balance sheet CLO the terms and conditions under the underlying assets are neither consistent nor standard. For this transaction, as of May 11, 2007 (the cut-off date), 36 NT dollar denominated loans attributable to 17 obligors are included in the portfolio. 78.4% of the pool constitutes senior secured obligation of the borrower while the remaining 21.6% constitutes senior unsecured obligation. Pool composition for this transaction is relatively concentrated in many dimensions. 83% of the pool is syndication loans and the remaining 17% bilateral loans. Despite encompassing industries such as computer storage and peripherals, building and development, conglomerates, electronics/electrical, nonferrous metal/minerals, and utilities, the pool has 76% of its loans concentrated in the top four industries' accounts. In addition, 46% and 77% of the pool are attributable to the top 4 and 8 borrowers respectively. Obligation attributable to borrowers other than the top 8 each account for less than 5%.

Major terms and conditions regarding the underlying loans are as follows:

• All loans are existing, non-revolving, non-convertible, transferable, and prepay-able;

• All loans have no delinquent history within the past 1 year and have never been restructured;

• With regard to yield, all but one loan stipulate a floating rate while referring to multiple interest indices;

• All loans have already been fully drawn down;

• All payments will be in New Taiwan dollars and all interest will be made in arrears;

• Principal repayment scheme includes controlled amortization, annuity amortization, and bullet redemption;

• All payments under all syndication loans will be colleted by agent bank first and then remitted to the trust account;

• All borrowers have no option to change interest rate, maturity date and payment currency;

• 3 obligors have waived the right to set-off;

• All but 3 obligors have provided promissory notes;

• Syndication banks under the same loan enjoy claim against liquidation proceed of the collateral on a pro rata and pari passu basis;

• Underlying collaterals for those senior secured loans include, but are not limited to real estate property, factory facility, and machinery;

• All of the relevant secured loans have set the pledge as first lien, registered with a government entity, and prohibit further pledge;

• Any overdue interest and/or principal will fall due by the last payment date; and
• With respect to modification of current terms and conditions under the syndication loan contract:
  • 39% of the loans require consensus from all participants to change the outstanding principal balance;
  • 38% of the loans require consensus from all participants to change the interest rate;
  • 48% of the loans require consensus from all participants to change the maturity date;
  • 28% of the loans require consensus from all participants to change the collateral or guarantor(s);
  • 39% of the loans require consensus from all participants to restructure the loan or change amortization schedule;
  • 25% of the loans require consensus from all participants to change the payment currency; and
  • 37% of the loans require consensus from all participants to change the participant resolution mechanism.

Credit and Cash Flow Analysis

Taiwan Ratings relies on Standard & Poor's CDO Evaluator and a cash flow model provided by the arranger to verify the adequacy of the capital structures under the transaction.

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 ratings or estimates (if the obligor is not currently rated by Taiwan Ratings or Standard and Poor's), size, and maturity of each asset, the correlation among assets, and the bivariate emerging market risk, if any. A probability distribution for potential default rates presents the credit quality of the portfolio. From this probability distribution, the CDO Evaluator derives a scenario default rate (SDR) under each rating scale. Each SDR identifies the minimum level of portfolio defaults a CDO tranche must withstand to support the corresponding rating level.

The table below lists benchmark statistics from CDO Evaluator^TM .

S&P Default Measure (DM)
DM describes the annualized weighted average portfolio default rate. By taking the average default probability of the assets, weighted by the principal balance and then annualized by finding the constant annual default rate, we can compute the DM. This 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 with an assumed correlation, divided by the standard deviation assuming no correlation. It measures the effect of correlation on the standard deviation in default rates. For example, if the CM equals 1.3, the standard deviation of default rates is 30% greater due to correlation.

Taiwan Ratings has performed cash flow analysis based on the credit sizing results aforementioned and the transaction structure. Assumptions about recovery rate given default form a major part of the cash flow test. Taiwan Ratings adjusted its benchmark recovery assumptions based on the collateral quality, pledge quality, pledge coverage, and expected workout efficiency to come up with a recovery assumption for each loan. The cash flow test aims to verify that, under the premise that prompt interest payments and ultimate principal repayments can be achieved, the transaction is able to withstand the SDR corresponding to the rating scale of each class of trust certificates under various stress scenarios, including but not limited to default timing, recovery timing, and prepayment.

Structural Analysis

Commingling Risk
The transaction faces very remote commingling risk as: i) majority of the payment will be directly remitted to the trust accounts, ii) should the obligor choose to pay in any form which requires the Servicer to collect the payment, the Servicer must remit the payment to the trust account within one business day, and iii) recovery proceeds from the Servicer working out defaulted loans will also be remitted within 1 business day. Commingle risk might also arise when agent bank(s) for syndication loan(s) default. Nevertheless, the current ratings of relevant agent banks are commensurate with the transaction, which limits the potential commingling risk arising from agent banks' insolvency.

Obligor Set-off Risk
The transaction is initially subject to set-off risk. CUB is a deposit-taking bank and some of the underlying obligors do have deposit or other debt-like relationships with it. According to the transaction legal opinion, the obligor is entitled to set-off against the SPT the debt amount owed by CUB as of the closing date. The originator's obligation to set aside a set-off reserve as soon as its rating is lowered to preset levels will mitigate this risk.

Prepayment Risk
The transaction is subject to prepayment risk as most syndication loans have granted borrowers the right to prepay, partially or fully. The clean-up call option toward the originator can also incur prepayment to the investor. Investors need to notice that prepayment of the principal is not defined as default by Taiwan Ratings.

A side effect initially caused by prepayments is the reducing pool yield. The IRS will partially mitigate this issue, as prepayment will not affect the payment receivable by the trustee immediately following any prepayment. No additional charges will arise for the reduced settlement amount for subsequent dates. The aforementioned cash flow test takes account of prepayment.

Negative Carry Risk
The transaction is initially subject to negative carry risk as the post-hedge weighted average pool yield is lower than the coupon rate of Class D trust beneficial certificates. The cash reserve set aside at closing has partially mitigated such risk. The aforementioned cash flow test also considered this.

Liquidity Risk
Liquidity risk might or might not arise during the service-provider transition period. The cash reserve set aside at closing has mitigated such risk.

Legal and Tax Analysis

The transaction is structured in accordance with the Financial Asset Securitization Law of Taiwan, which provides for the establishment of the SPT, the legally perfected transfer of assets from the originator to the SPT, and protection from other creditors' and third parties' claims. Taiwan Ratings has received satisfactory legal and tax opinions.