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This presale report is based on information as of January 3, 2008. 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.
*The rating on
each class of certificate is preliminary and subject to change at any
time. Issuer: Land Bank of Taiwan (Land Bank; twAA+/Positive/twA-1+) in its capacity as trustee for Standard Bank Cash Flow CBO 2007-1 Special Purpose Trust (the SPT). Expected Closing Date: January 3, 2008 Final Legal Maturity Date: December, 2019 Trustor/Seller: Standard Bank of South Africa Ltd., Taipei Branch (Standard Bank; Rated BBBpi by Standard & Poor's Ratings Services) Trustee/Custodian: Land Bank Hedge Counterparty: China Development Industrial Bank (CDIB; twAA/Stable/twA-1+) Committed CP Underwriter: China Bill Finance Corporation Arranger: Standard Bank Rating Dependents: Account Bank, Eligible Investment, Hedge Counterparty, Committed CP Underwriter Taiwan Ratings Corp. (Taiwan Ratings) assigns its 'twA-1', and 'twA-p NRi' preliminary ratings to NT$2,500 million and NT$2,750 million trust beneficial certificates issued through the SPT. The preliminary ratings address the probability of timely payment of principal toward Class A trust beneficial certificates and ultimate payment of principals on or before the final legal maturity date toward Class B trust beneficial certificates. This is the second cash flow CBO deal originated and arranged by Standard Bank. The preliminary ratings reflect:
Strengths, Concerns, and Mitigating Factors: Strengths:
Concerns:
Mitigating Factors:
The transaction process for the deal is similar to most existing CBO deals. The deal will adopt true sale structure and use a Special Purpose Trust (SPT) as the intermediate entity. The SPT will have to comply with Taiwan Rating's Special Purpose Vehicle criteria. The transaction begins with the implementation of necessary procedures for the purpose of perfecting the asset transfer. At closing, Standard Bank will entrust a portfolio of NT Dollar bonds and US dollar bond along with all rights under them to the SPT. Upon receiving such entrustment for the SPT, Land Bank, the trustee, will issue 2 classes of trust beneficial certificates, of which Class A will be placed to the Commited CP Underwriter and Class B will be publicly placed to investors. Proceeds from the issuance will be paid to the originator to settle the asset entrustment. The transaction will initially incur interest rate, payment timing, and tenor mismatch. The trustee will enter into an Interest Rate SWAP (IRS) to hedge the basis risk. The Hedge counterparty, CDIB, 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 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. Tenor mismatch between the asset and liability of the SPT will be addressed by the Committed CP Underwritten Agreement. The Committed CP Underwriter must maintain a commensurate credit quality throughout the life of the transaction. It is Taiwan Ratings' opinion that, as of the publishing date of this report, the underwriter's credit quality is commensurate with this transaction. Taiwan Ratings will review the underwritten agreement to make sure such mismatch has been appropriately addressed. A legal council must also address the enforceability of the agreement. The asset pool for this transaction will be static. The trustee will also act as Custodian at closing. A cash reserve will be set-aside at closing. The diagram below outlines the transaction structure: Terms and Conditions of the Certificates Class A trust beneficial certificates will be issued in the form of CP rolling over every month. Class B will be issued in the form of a mid-term note without stated coupon. Both interest and principal distribution must follow the waterfall specified on the transaction documents. The waterfall is sequential and pass-through. The trustee can draw down the cash liquidity reserve and pool the drawdown amount into interest/principal collections and CP issuance proceeds to cover the shortage toward senior fees and expenses and the amount required to redeem the maturing CP. Taiwan Ratings would like to draw investors' attention to the fact that the Committed CP Underwriter's rating is a dependent rating for the transaction. Ratings assigned on both Class A and Class B trust beneficial certificates might be adjusted following any rating or credit assessment action toward the underwriter. 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 for Class B and principal distribution for Class A trust beneficial certificates, however, will be subject to withholding tax at the rate stipulated by the tax authority. Consequently, interest/principal received by certificate holders will be net of tax withheld. 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. A total of 9 bonds will be included in the pool at closing, of which 8 are NT$ bonds (6 structure notes, 1 coupon bond, 1 zero coupon bond) and 1 is a US$ bond. All fees related to US$ assets will not be covered by NT$ collections. Also, default of the US$ bond will not incur a trust termination event of the SPT. The 8 NT$ bonds can be attributed to 5 obligors and 2 industries. The weighted average tenor of the NT$ bonds is around 6.5 years. All NT$ bond issuers are rated at investment grades by Taiwan Ratings and/or Standard & Poor's Ratings Services as of the publishing date of this report. Taiwan Ratings relies on Standard & Poor's CDO Evaluator, a thorough pool profile analysis, and a cash flow model provided by the arranger to assess the portfolio risks and verify the adequacy of the transaction's capital structure, hedge mechanism, and sufficiency of the cash reserve. 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 EvaluatorTM.
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. The cash flow test aims to verify that, under the premise that prompt principal payments (for Class A) and ultimate principal repayments (for Class B) 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. Commingling Risk Commingling risk is fairly remote with this transaction given the direct remittance mechanism 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 of bonds included in the 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 to be fairly limited with this transaction. Liquidity Risk Liquidity risk initially exists with this transaction due to the interest rate, payment timing and tenor mismatch between the asset pool and the trust beneficial certificates. Basis risk including rate and timing mismatches is mitigated by the IRS. Tenor mismatch is mitigated by the Committed CP Underwritten Agreement. Service Provider Operational Risk Misconduct of service providers might incur loss to the investors. The existence of Custodian Termination Events and Trustee Termination Events enable investors to replace the service providers through trust certificate holders' resolution. The Committed CP underwriter will need to remedy transaction stakeholders' loss when it fail to meet its obligation under the underwritten agreement. 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.
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