Chailease 2007 Securitization 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

Profile

Issuer: Land Bank of Taiwan (Land Bank; twAA+/Stable/twA-1+) as trustee on behalf of Chailease 2007 Securitization Special Purpose Trust (the SPT)

Initial Cut-off Date: July 31, 2007

Closing Date: August 24, 2007

Final Legal Maturity Date: August 24, 2014

Seller/Servicer: Chailease Finance Co. Ltd. (Chailease)

Trustee/Back-up Servicer/Account Bank: Land Bank

Arranger: Industrial Bank of Taiwan (twA/Stable/twA-1) and The Hong Kong and Shanghai Banking Corporation Limited. (rated AA/positive/A-1+ by Standard & Poor's Ratings Services)

Issue: About NT$6 billion trust beneficial certificates due 2014

Rating Dependents: Account Bank, Eligible Investment

RATIONALE

Taiwan Ratings Corp. (TRC) assigns its 'twAAA' and 'twA' ratings to NT$4,470 million and NT$420 million trust beneficial certificates to be issued through Chailease 2007 Securitization Special Purpose Trust (the SPT). The certificates will be backed by a pool of equipment lease/installment receivables originated by Chailease Finance Co. Ltd. The ratings assigned to the certificates reflect:

• About 25.5% overcollateralization of equipment lease/installment receivables on the twAAA certificates and 18.5% of overcollateralization of equipment lease/installment receivables on the twA certificates;
• A payment structure that provides timely monthly interest and ultimate principal payments to noteholders by the final legal maturity date;
• Liquidity reserve set aside at closing to cover servicer transition risk and the mismatch in the payment frequency of the lease/installment receivables and the certificates;
• The sizing of margin interest reserve to cover any shortfall on interest to be paid to the obligor on its margin principal;
• The existence of a set of early amortization trigger mechanisms;
• The rating on the account bank and eligible investment; and
• The legal structure of the transaction, including the bankruptcy remoteness of the SPT.

STRENGTHS, CONCERNS, AND MITIGATING FACTORS

Strengths:

• Credit sizing is based on the historical performance of lease transaction instead of installment transaction which shows lower overdue ratio, despite the installment transaction accounting for about 85% of the initial pool to be securitized;
• The various early amortization performance triggers provide protection from any possible deterioration of the portfolio's credit quality due to the purchase of new receivables;
• Liquidity reserve will be funded at closing by the originator;
• Additional liquidity support toward senior fees and interest provided by principal waterfall;
• Margin interest reserve will be funded by the originator each time when margin deposits on new receivables are transferred to the SPT;
• Excess spread will be trapped for certain fixed amounts during the amortization period to cover senior fixed fees and expenses; and
• Commingle risk is partly avoided because the obligors will make payments through issuing a set of post dated checks when the lease/installment transactions are initially launched. The post dated checks will be transferred to the SPT along with the transfer of receivables.

Concerns

• The portfolio's credit quality may be affected due to the transfer of new receivables by the originator during the revolving period;
• There may be a payment mismatch on the asset side and liability side as the pool allows up to 20% of the receivables not to be paid on a monthly basis but the payment on the certificates is made monthly;
• The weighted average remaining tenor of the receivables to be transferred is allowed to be longer than the average tenor of the existing pool on the originator's asset book;
• The collaterals to be transferred to the trust are only those provided by obligors upon the execution of the Basic Agreement. As to the collaterals of Chailease's other claims against such obligor, these are excluded from the trust assets. Therefore, some collaterals provided by the same obligor to Chailease will not be transferred to the trust;
• Insurance interest on the underlying assets may not be successfully transferred;
• The initial pool has a high concentration on the manufacturing industry and further breakdown on the industry type is not available; and
• Under applicable civil laws, the servicer is unable to directly dispose of the underlying assets without the consent of the lessee if the lease has not yet matured. If the lessee does not agree for the servicer to take back the underlying assets, the servicer is able to appeal to the court for provisional measures, or prosecute for the return of the underlying assets. A compulsory action will be enforced only when a ruling has been delivered.

Mitigating Factors:

• The deal will enter into early amortization when the default ratio exceeds 6% of the principal balance of the pool. This default ratio trigger is sized into the credit enhancement. Moreover, delinquency ratio trigger and excess spread ratio trigger are in place to avoid new receivables being added to the pool when the pool quality deteriorates and when the pool yield is reduced;
• Concentration limit on obligors after being congregated will mitigate obligor concentration risk;
• A liquidity reserve is funded at closing and built up from excess spread subsequently to support payment mismatch on the asset and liability side;
• The lengthened weighted average remaining tenor of the receivables is taken into account when sizing the credit enhancement; and
• Recoveries on non-cash equivalent collateral or underlying assets (including insurance claims) are not given credit when sizing the credit enhancement

TRANSACTION STRUCTURE

This is the first equipment lease/installment securitization deal in Taiwan. At closing, the SPT will issue certificates and use the proceeds to purchase lease/installment receivables of about NT$6 billion from Chailease. The seller will transfer the right, title and interest in the pool of lease/installment receivables to the issuer. The structure will have a revolving period up to 3 years followed by a 2 year amortization period. During the revolving period, the seller will have the right to transfer additional lease/ installment receivables to the issuer monthly. Upon the occurrence of an early amortization event, no new receivables will be transferred to the issuer and the structure will enter an amortization period. Early amortization triggers include default ratio trigger, delinquency ratio trigger, excess spread ratio trigger and non-performing of the servicer and trustee trigger.

The Originator/Servicer Details

Chailease, the originator, was established in 1977. The company reported net worth of NT$10.3 billion and net profit before tax of NT$491 million as of December 31, 2006. The company has 708 employees. In terms of contract amount, Chailease has 37% market share in lease transactions and 61% market share in installment transactions. Chailease mainly provides lease, installment and local factoring financing to small to midsize companies.

TRC conducted a review of the origination, underwriting, collection and overdue management procedures. As servicer, Chailease is responsible for the day-to-day administration and ongoing servicing of the lease/installment receivables and for producing all reports and calculations in connection with the performance of the receivables.

Underlying assets and collateral

The receivables consist of payments made by obligors in relation to lease/installment contracts. The receivables are classified into lease or installment categories depending on the underlying assets to be financed. Lease receivables are mainly backed by equipment or machinery, while installments are backed by raw materials. The lease/ installment contract provides for the payment on a monthly basis or other payment term as agreed between the obligor and Chailease. All obligors make the scheduled lease/installment payment in the form of post-dated checks. The obligors are required to issue a set of post-dated checks required for the life of the lease/installment to Chailease before the lease/installment is extended. All the post-dated checks will be transferred under the title of the trust and will be collected when due. For certain lease /installment transactions, obligors are requested to provide additional collateral to enhance their credit. Collateral may constitute several forms including margin, share pledge, certificate of deposit pledge, real estate mortgage and chattel mortgage. Additional collateral will be changed under the name of the trust when the lease/installment receivables are securitized.

In addition to the payments made under the lease/installment contract, the issuer is entitled to receive money from several other sources, which include prepayments, proceeds from the disposal of the underlying assets, proceeds obtained under insurance policies and proceeds from the disposal of additional collateral.

The lease receivables to be transferred to the portfolio have to comply with certain eligible criteria which stipulate the payment frequency, yield, weighted average remaining tenor and concentration limit of the receivables.

Terms and Conditions of the Certificates

The senior and mezzanine trust certificates will receive fixed coupon payments on the eighteenth business day of each month. Interest payments are made to the senior trust certificates and then to the mezzanine trust certificates. The trust certificates will only amortize during the amortization period with principal payment paid to the senior trust certificates and then paid to the mezzanine trust certificates on a pass trough basis.

Principal collection will be temporarily drawn to cover shortage on the interest waterfall down to the interest of the rated certificates. Liquidity reserve will be used to fund the remaining shortage if proceeds from principal collection are insufficient to cover down to the interest of the rated certificates.

Trust asset will be liquidated following a failure of the SPT to make timely payment on the most senior trust certificates and not remedied within five business days or rated trust certificates not fully redeemed by the final legal maturity. All proceeds from the trust (other than liquidity reserve and deposit margin reserve) will be distributed with payments made to principal and interest of the senior trust certificates followed by payments made to the principal and interest of the mezzanine trust certificates. Liquidity reserve will be drawn if there is any shortage from such payments.

Credit Structure

Taiwan Ratings analysis includes a conservative assessment of the credit risk inherent in the transaction. The credit and liquidity enhancement levels were sized after analyzing specific risks. The twAAA rated certificate is supported by a total of 25.5% of mezzanine and subordinated trust certificate and the twA rated certificate is supported by an 18.5% subordinated trust certificate. Several reserves will be provided by Chailease to mitigate the liquidity risk and shortfall in interest amount to be paid to obligors on its margin deposits.

Default and delinquency

The originator extends either lease or installment to its clients depending on the types of assets for financing. Taiwan Ratings analyzed historic performance data of the originator's static lease pool and installment pool. A base case default rate was determined from the historic performance data of the two pools and stressed depending on the rating category of the certificates. No credit was given to recoveries from underlying assets (including insurance claims) or non-cash equivalent collateral in the analysis. The pool will enter into amortization when the default ratio of the pool exceeds 6% of the principal balance of the pool.

The historic performance data shows that the delinquency ratio on lease pool is higher than the installment pool. In determining the base case default rate of the pool, the delinquency ratio of the lease pool instead of the installment pool was selected as a reference of the base case default rate. This is because the securitization transaction is a revolving structure which may allow up to 100% of the asset pool to contain lease receivables even though the initial pool will only have about 15% of total receivables from lease receivables. To maintain the quality of the pool, a delinquency ratio trigger is set to stop the purchase of new receivables when the delinquency rate reaches a delinquency trigger ratio.

Commingling risk

All the scheduled lease/installment payments due are made by checks. When the lease/installment is first extended to the borrower, the borrower will issue a set of post-dated checks to cover all payment during the life of the lease/installment. The trust will be entitled to these checks after the right on lease/installment is transferred to the trust. The checks will be deposited with the account bank of the trust after securitization. The checks will be sent out for collection from the trust account when due. In some exceptional case, the servicer may receive payments from the obligors. The servicer is required to remit the proceeds to the trust account within one business day after the receipt of the proceeds. However, the servicer may not be able to remit the proceeds to the trust account timely if it needs to reconcile the payments with the receivables. As a result, a credit enhancement is sized through overcollateralization to mitigate commingle risk caused by the delay of remittance of proceeds to the trust.

Liquidity risk

Liquidity risk is addressed through sizing a liquidity reserve. Liquidity risks arise during the servicer transition period. In addition, the mismatch of payments between the asset and liability may cause liquidity risk. This is because the portfolio allows up to 20% of payments not to be made on a monthly basis while note interest payments are to be made on a monthly basis. Liquidity reserve will also serve to mitigate the risk of any delinquency payment from the obligors.

During the amortization period, the total amount of interest generated from the asset pool will reduce as a result of the shrinking pool size. However, on the liability side, the trust will still have to pay fixed senior fees and expenses. To mitigate the risk of insufficient yield on the asset side to pay the senior fees and expenses during the amortization period, excess spread will be trapped for certain fixed amounts starting from the amortization period to cover such shortage.

Prepayment

During the revolving period, proceeds from scheduled payment and prepayment will be used to purchase new assets. If such proceeds are not fully utilized to purchase new assets, they may cause insufficient yield on the asset pool to cover senior expenses and interest payments on the notes. This risk is mitigated by an excess spread trigger which will force the pool to be amortized if excess spread is inadequate. During the amortization period, proceeds from prepayment will pass through to the note holder.

Margin deposit reserve

When Chailease extends credits to the obligors, some obligors may be required to deposit a margin amount to enhance the credit profile of the receivables. When all receivables are timely and fully repaid by the obligor, Chailease will return the margin to the obligors along with an interest as agreed when the credit was initially extended. The margin will be used to offset any payment due if the obligor fails to pay.

Since lease and installment receivables will be transferred to the SPT during the revolving period, the relevant margin will also be transferred to the SPT. The margin will be deposited with the trust account with deposit interest rate reset periodically until the deposit is retired. If the margin was not used to set off any amount due from the obligor, the SPT will return the margin to the obligor along with the pre-agreed interest rate (between Chailease and the obligor) when the lease/installment receivables are fully repaid. Reserves will be provided by Chailease when the margin is transferred to the SPT to cover the shortage between the deposit rate agreed between Chailease and the obligor and the interest rate on the deposit with the trust account.

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 the protection from other creditors' and third parties' claims.

Prior to assigning the final ratings and the closing of the transaction, Taiwan Ratings 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 credit quality of lease/installment receivables 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.