?00 billion Series 2001-1 and Series 2001-2 secured notes

Disseminated from RatingsDirect
Publication date: 09-Nov-2001

Analysts: George Sun, London, 44-20-7826-3648, george_sun@standardandpoors.comBrian O'Keefe, New York, 212-438-2516, brian_okeefe@standardandpoors.comKenji Kondo, Tokyo, +(81) 3-3593-8590, kenji_kondo@standardandpoors.comHenry Albulescu, New York, 212-438-2382, henry_ albulescu@standardandpoors.comDarren J. Esser, New York, 212-438-1581, darren_ esser@standardandpoors.com

This presale report is based on information as of Nov. 13, 2001. 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. Please call Standard & Poor's at (1) 212-438-2400 for the final ratings when assigned.

Profile
Expected closing date: Dec. 3, 2001.

Collateral: A pool of loans to large and midsize corporations and municipals in Japan originated or purchased by Shinsei Bank Ltd.

Global Arrangers

Nikko Salomon Smith Barney, Salomon Smith Barney

Lead Managers: Nikko Salomon Smith Barney Europe

Shinsei Securities Co. Ltd. (Japan Only)

Seller/Servicer: Shinsei Bank Limited.

Indenture trustee: Citibank N.A.

Master trust trustee: Shinsei Trust & Banking Co. Ltd.

Swap counterparty : Deutsche Bank AG, Tokyo Branch

Rationale
Standard & Poor's expects to assign ratings to Shinsei Funding One Special Purpose Co.'s Series 2001-1 class A notes and Series 2001-2 class A notes. The notes are ultimately backed by a pool of loans to large and midsize corporations and municipal borrowers in Japan originated or purchased by Shinsei Bank Ltd.

The preliminary ratings are based on information as of Nov. 13, 2001. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. The preliminary ratings address the full and timely payment of interest and the ultimate full repayment of principal by the transaction's legal final maturity date.

This transaction is a collateralized loan obligation (CLO) using a Master Trust structure. It is the first and second series of CLO transactions funded through Shinsei Bank Master Trust (Master Trust), a master trust organized under the laws of Japan, created on September 27, 2001, and sponsored by Shinsei Bank. The assets of the Master Trust are a pool of corporate and municipal loans. Shinsei is the trustor of the Master Trust and the transferor of the loans to the Master Trust. Shinsei Trust & Banking Co. Ltd. (Shinsei Trust), a bank created under the laws of Japan, is the trustee of the Master Trust.

Each series of class A notes will be backed by class A investor certificates issued from the Master Trust. In addition, there are also class B certificates (assigned preliminary 'BBB' ratings) and class C certificates (unrated) for Series 2001-1 and Series 2001-2 which:

• Will provide credit enhancement to the class A certificates;
  
• Are not owned by the issuer and will not be acquired by the issuer; and
  
• Will initially be retained by Shinsei Bank and may be sold thereafter.
  

The preliminary ratings on the Series 2001-1 class A notes and 2001-2 class A notes are based on:

• The level of credit enhancement provided through structural subordination. Series 2001-1 class A certificates and 2001-2 class A certificates benefit from 20% and 30% subordination respectively, provided by class B and C certificates issued by the Master Trust.
  
• Sufficient reserve funds to mitigate liquidity risk. The reserve fund will be fully funded with ¥330 million for the Series 2001-1 certificates, which is equal to 0.50% of the aggregate principal amount of the Series 2001-1 class A and B certificates. The reserve fund will be funded with ¥234.3 million for the Series 2001-2 certificates, which is equal to 0.50% of the aggregate principal amount of the Series 2001-2 class A and B certificates. Over the course of the transaction, the required reserve fund amount for the Series 2001-1 certificates will be determined as the greater of either 0.50% of the aggregate principal amount of the Series 2001-1 class A and B certificates or three months of interest owed on the Series 2001-1 class A and B certificates. The same will be true for the required reserve fund amount for the Series 2001-2 certificates;
  
• Stringent loan eligibility criteria, including the requirements that each loan has full recourse to the borrower, has a borrower that is rated at least "4C" by Shinsei Bank (the Master Trust can accept loans down to the "6C" category but loans with borrowers rated from 5A and 6C would be 0% default allocation loans), provides for cash payments that fully amortize its outstanding principal balance by maturity, and is payable only in Japanese yen;
  
• The portfolio of loans will be subject to certain maximum concentration percentages established for each series of certificates to determine if there is an overconcentration by borrower or by other loan characteristics as of any particular date;
  
• The expected ability of the structure to repay the notes even under stressed cash flow scenarios due to, among other things, the quality and diversity of the underlying assets;
  
• The experience of Shinsei Bank as originator and servicer; and
  
• The robustness of the legal structure.

Strengths.
The strengths of the transaction are:

• A strongly diversified portfolio of corporate loans to large and midsize companies and municipal borrowers in Japan;
  
• Other than the loans made to municipal obligors or other government-related obligors (many of which are explicitly guaranteed by the government of Japan), the loan portfolio does not have exposure in excess of 7.18 % in any of Standard & Poor's 33 industry categories.
  
• A solid transaction structure with rigorous early amortization triggers and limits on obligor concentrations in the pool.

Concerns.
The following concerns arise with respect to the transaction:

• Potential conflict of interest between the holders of the different series of notes;
  
• The possibility that funds might be insufficient to make the single principal payment on the Series 2001-1 class A notes and the Series 2001-2 class
• A notes on the expected principal payment date;
  
• Reassignment of loans to Shinsei Bank may subject the Series 2001-1 class A notes and the Series 2001-2 class A notes to increased credit and default risks;
  
• The potential inability of Shinsei Bank to exercise purchase cancellation rights granted by Japan's Deposit Insurance Corp. on loans it transferred to the Master Trust, which could cause the payments on the Series 2001-1 class A notes and the Series 2001-2 class A notes to be reduced or delayed;
  
• ¥1.207 trillion, or 84%, of the ¥1.437 trillion outstanding principal balance of the loans is owed by obligors not publicly rated by Standard & Poor's; and
  
• The ability to substitute loans into the pool, which could change the portfolio's characteristics.
  
• Recovery rates on defaulted loans in Japan are typically quite low.

Mitigants.
The concerns are mitigated by the following factors:

• The aggregate maturity allocation percentage (AMAP) test assures that on every future principal payment date, available scheduled principal collections will be at least 110% of the amount required to make principal payments on the various certificates and notes;
  
• Nonpayment of principal on the expected payment date is not considered an event of default. The issuer has an additional two-year tail period from the expected payment date to pay principal in full;
  No credit was given in the cash flow analysis for purchase cancellation rights;
  
• Standard & Poor's performed an extensive credit mapping analysis of Shinsei Bank's lending practices and procedures;
  Standards & Poor's Trading Model must be run on the pool at least monthly, and the results reported, to monitor changes in the portfolio's credit quality;
  
• Eligibility criteria and early amortization triggers provide added protection to the transaction;
  
• Ongoing surveillance will be performed on all of the loans transferred by Shinsei Bank to the Master Trust; and
  
• The seller is required to maintain the minimum adjusted seller's interest to mitigate potential set-off risk and loan overconcentrations.
  No credit was given in the cash flow analysis for recoveries on defaulted loans.

Terms and Conditions of the Notes
Security.
The Series 2001-1 and 2001-2 class A notes will be secured by a first priority security interest in the Series 2001-1 collateral and the Series 2001-2 collateral in the form of a pledge (shichiken) pursuant to a pledge agreement between the issuer and the indenture trustee. The Series 2001-1 collateral and the Series 2001-2 collateral will include:

• All of the Issuer's rights, title, and interest in and to the Series 2001-1 class A certificates and the Series 2001-2 class A certificates issued from the Master Trust;
  
• All of the Issuer's rights under the certificate purchase agreement; and
  
• All proceeds of the foregoing.
  

Interest.
The notes from all series will pay a floating rate of quarterly interest in arrears based on the three-month yen LIBOR plus a relevant margin. Upon the occurrence of an early amortization event, the notes shall pay interest monthly based on the one-month yen LIBOR.

Principal repayment.
Principal on the Series 2001-1 class A notes is scheduled to be paid in a single payment in October 2003. Principal of the Series 2001-2 class A notes is scheduled to be paid in a single payment in October 2006. If a partial early amortization event, an early amortization event, or an acceleration of the Series 2001-1 and Series 2001-2 class A notes following an event of default occurs, principal of the Series 2001-1 and 2001-2 class A notes may be paid prior to the expected principal payment date. It will not be an event of default under the Series 2001-1 and 2001-2 indenture if the outstanding principal amounts of the Series 2001-1 and 2001-2 class A notes are not repaid in full on their expected principal payment dates. It will be an event of default under the Series 2001-1 and the 2001-2 indenture if the outstanding principal amounts of the Series 2001-1 and 2001-2 class A notes are not paid in full on the legal principal maturity dates of October 2005 and October 2008 respectively.

Originator
Shinsei Bank is one of three long-term credit banks in Japan. Shinsei was formerly known as Long Term Credit Bank of Japan (LTCB), which was originally established in 1952 to provide long-term financing to the corporate sector, funded mainly through debentures.

In October 1998, the bank was temporarily nationalized by the Japanese government, and all of its outstanding shares were acquired by the government's Deposit Insurance Corp. (DIC). On March 1, 2000, the ownership of the bank was transferred to New LTCB Partners C.V., a Dutch-registered limited partnership established by Ripplewood Holdings LLC and a consortium of private investors. The private investors include Mellon Bank, UBS Paine Webber, GE Capital, ABN AMRO Bank, Travelors Investment Corp., and Deutsche Bank Alex Brown. After the re-privatization, the bank's name was changed to Shinsei Bank Limited. in June 2000.

Traditionally, Shinsei Bank's major revenue bases have been in conventional commercial banking, such as lending to large corporate clients. Since the ownership transfer, the bank's strategy has been changed to also focus on investment banking and providing value-added financial products and services to clients. Shinsei Bank is also looking to stabilize its funding by diversifying its funding sources. So far, Shinsei Bank has relied heavily on deposits and debentures for funding, the latter of which are credit sensitive compared with deposits. Through this securitization, Shinsei Bank hopes to improve its overall asset-liability management by establishing a new source of funding. At the time of this report, the bank currently carried Standard & Poor's 'BBB-' long-term and 'A-3' short-term counterparty credit ratings. The outlook on the long-term rating is stable.

Credit Analysis
Eligible loans included in this transaction are loans to corporations and municipalities in Japan originated by Shinsei Bank or its predecessor, LTCB. The initial portfolio as of Aug. 31, 2001, has the following characteristics:

• A total outstanding principal amount of ¥1,437,750,352,955 related to 2,304 loans to 613 obligors;
  
• The largest borrower has an outstanding principal balance of ¥181,668,550,000, the smallest borrower has an outstanding principal balance of ¥2,000,000, and the average outstanding borrower principal amount is ¥2,345,432,876.
  
• The largest loan has an outstanding principal balance of ¥48,116,000,000, the smallest loan has an outstanding principal balance of ¥180,000, and the average outstanding principal amount of the loans is ¥624,023,591.
  
• The weighted average life of the loans is 21.01 months;
  
• 79.5% are fixed-rate loans; and
  
• 20.5% are floating-rate loans.

Credit Quality of the Portfolio
To understand further Shinsei Bank's credit rating system and the credit approval and monitoring process, Standard & Poor's conducted a full-day due diligence meeting with the bank. In February 2001, Shinsei Bank adopted a new credit rating system focused on incorporating neural network technology, improving the efficiency of the approval and monitoring process, and facilitating proper pricing for their products. The credit rating system consists of a quantitative scoring portion using a credit rating model and an analytical and judgmental qualitative portion based on extensive credit rating committees. Through this process, a credit score is derived. Primarily based on the scores for individual obligors, Shinsei Bank conducts the approval process and necessary monitoring for each transaction. Through the due diligence process, Standard & Poor's found that Shinsei Bank's informational requirements, credit rating guidelines, risk monitoring processes, and approval processes are well within acceptable standards.

To further assess the credit quality of the Master Trust loan portfolio to a comparable global scale of Standard & Poor's, Standard & Poor's performed a mapping analysis between Shinsei Bank's internal credit rating system and Standard & Poor's rating scale.

Because very few of the borrowers in the loan pool are publicly rated, Shinsei Bank utilized Standard & Poor's Japanese CreditModel to derive credit assessments for a about 1,800 corporate borrowers in the potential pool. CreditModel is an internet-accessible credit scoring model for public and private firms. The model is tailored to specific industries and regions, employs sophisticated neural network technology, and is powered by Standard & Poor's global credit experience. While not actual credit ratings, the scores reflect Standard & Poor's credit analysis experience in each sector. A score is a quantitatively derived estimate of a Standard & Poor's credit rating. The interpretation of financial data is shaped by Standard & Poor's views of credit in specific industries and regions. The models weigh each input in the context of the other inputs, recognizing non-linear relationships. Models are systematically validated and reviewed by Standard & Poor's senior credit analysts. To assure the accurate and proper use of the CreditModel for the purpose of this transaction, Ernst & Young conducted an agreed upon audit of the procedures to verify the accuracy of the data inputs, the proper use of the model for obligors within an industry, and the outcome by actually rerunning the model separately. Standard & Poor's also performed independent credit assessments on the top 50 obligors in the pool and on certain municipal borrowers in the loan pool.

Next, Standard & Poor's performed a correlation analysis between Shinsei Bank's internal credit rating scores and Standard & Poor's public ratings and credit assessments. For all of the borrowers, Shinsei Bank's credit rating committee conducts ongoing reviews of the respective credit ratings and may change a rating to reflect the borrower's up-to-date credit standing at any time. Credit ratings are reevaluated at least once a year. On at least an annual basis, Shinsei Bank will use Standard & Poor's Japanese CreditModel to update borrower credit assessments, and Standard & Poor's will update the ratings correlation analysis.

The correlation analysis is only one element of Standard & Poor's credit analysis, and the results are considered in conjunction with other factors, including extensive due diligence meetings with Shinsei Bank conducted by Standard & Poor's Bank Ratings Group and Structured Finance Ratings Group.

The analysis described above produced correlation results between Shinsei Bank's internal credit rating system and Standard & Poor's rating scale (see Table 1).

Maintenance of Credit Quality
Over the life of this transaction, Shinsei Bank is expected to entrust additional loans to the pool. All additional loans to additional borrowers transferred in this way from Shinsei Bank to the Master Trust must meet specific criteria and conditions, one of which is he requirement to run and report the results using the Standard & Poor's Trading Model. Standard & Poor's Trading Model is a dynamic, analytical computer model developed by Standard & Poor's to estimate the default risk of a portfolio of obligations, taking into account such factors as borrower rating, loan maturity, loan amount, and industry diversification. Shinsei is required to run the Trading Model and report its results at least once per month. This mechanism constantly monitors the loan pool and ensures that the credit quality and diversity of the portfolio does not deteriorate as loans are transferred into the Master Trust.

Industry Diversification of Loans
The Master Trust loan portfolio is well diversified in terms of the distribution of borrowers by Standard & Poor's industry category classifications (see Table 2 below). While there is certain concentration in the government-related category (including municipal, government, and government-related issuers), Standard & Poor's deems the concentration risk for this particular category as being small, representing "corporate Japan," and as not being vulnerable to any particular industry.

Geographic Diversification of Loans
According to the eligibility criteria for loans included in the Master Trust, each borrower (or the guarantor of the borrower) must have its principal place of business located in Japan and must be organized under the laws of Japan (See Table 3 for the geographic distribution of borrowers in the Master Trust loan portfolio).

Cash Flow Analysis
To verify that this transaction's capital structure allows timely payment of interest and ultimate repayment of principal on all classes of rated notes, Standard & Poor's performed a cash flow analysis, subjecting the transaction to a variety of stress scenarios.

Standard & Poor's CDO Evaluator system is an integral part of Standard & Poor's methodology for rating and surveilling CDO transactions. Through Monte-Carlo methodology, it evaluates the credit quality of a portfolio, taking into consideration the credit rating, size, and maturity of each asset and the correlation between each pair of assets. The credit quality of the portfolio is presented in terms of a probability distribution for potential default rates. From this distribution for each credit rating the CDO Evaluator derives a set of stressed default rates, which identifies the maximum level of portfolio defaults that a CDO tranche with that rating should be able to withstand without defaulting.

Sufficient subordination for Series 2001-1 and 2001-2 class A notes was calculated by running Standard & Poor's CDO Evaluator to estimate gross loss levels. For Series 2001-1 and 2001-2, the subordination level was 20% and 30% respectively. The gross potential loss calculated from the CDO Evaluator was applied to a portfolio cash flow model along with assumptions on the timing and pattern of defaults, as well as the amount of excess spread generated by the assets. The cash flow model did not give any credit to recovery for loans that default.

The cash flow analysis demonstrated that both the Series 2001-1 class A notes and the Series 2001-2 class A notes pass Standard & Poor's 'AAA' rating requirements. In particular, the Series 2001-1 class A notes are able to withstand a stressed default rate of 19.27% on the loan portfolio and still pay timely interest and ultimate principal. The Series 2001-2 class A notes are able to withstand a stressed default rate of 20.70% on the loan portfolio and still pay timely interest and ultimate principal.

Servicer Issues
Commingling risk.
In this transaction, loan obligors will make payments directly into the account of Shinsei Bank, as servicer. Because there are no separate custodial accounts, there is the potential for funds of the Master Trust to become commingled with other funds of Shinsei Bank. Under Japanese law, if a servicer files for bankruptcy, collected funds residing in an account of the servicer can be challenged by the bankruptcy trustee and appropriated as general assets of the defaulting servicer.

This commingling risk is mitigated by various transaction requirements. The collections allocable to the master trust must be retransferred and segregated within three business days of receipt. Thus, the commingling exposure is limited to three business days' worth of collections. According to Shinsei Bank's current obligor payment schedule, about 60%-70% of a given month's total collections are concentrated in the last three days of the month. To alleviate this risk, there is a two-year "tail period" in this deal. Thus, even if the transaction is unable to redeem principal due to commingling exposure at the expected final maturity date, the transaction can still rely on an additional 24 months of expected cash flow to recover the commingled funds.

Furthermore, there is a principal funding mechanism (the AMAP test) that aims to ensure all the scheduled collateral cash flow prior to the expected maturity date is sufficient to fund the principal payment at the expected maturity. These scheduled payments will fund a principal funding account. To address possible uncertainty in the scheduled cash flow, there is a 10% cushion built into the required formula, which, in addition to the 5% cushion in the minimum seller's interest, would also mitigate commingling risk. As an additional protection to noteholders, if Standard & Poor's long-term rating on the servicer is lowered to below 'BB+', the AMAP test will be revised so that at least 110% of the required principal payments on the certificates and notes on each future principal payment date must be available as scheduled principal collections one month prior to each relevant future principal payment date.

Set-off risk.
Set-off is a risk that allows borrowers to offset their receivable rights and payment obligations with the originator, in this case Shinsei Bank. Set-off risk exists in this transaction because Shinsei Bank takes deposits from or issues debentures to certain loan obligors. In the event that Shinsei Bank defaults, these obligors may be able to set-off their deposit or debenture amounts against the loans, thus reducing their loan balances. This would have an adverse effect on the deal because the loan portfolio balance may be reduced without a corresponding cash inflow. To crystallize this set-off exposure, it is generally considered that notification to obligors and waiver of set-off rights by such obligors may be required. This transaction does not require obligor notification, obligor perfection or a waiver of set-off rights at closing. As the set-off related deposit or debenture amount increases over time, set-off exposure can similarly increase. To mitigate this risk, this transaction requires Shinsei Bank to keep track of the set-off exposure and allocate at least the exposed amount as additional adjusted seller's interest, in addition to each class of investor certificates' 5% cushion in the minimum seller's interest.

Back-up servicer provisions.
In the servicing agreement, the Master Trust trustee, Shinsei Trust, and the servicer Shinsei Bank, have agreed to the following back-up servicing provisions:

• If Standard & Poor's long-term unsecured debt rating on the servicer is lowered to 'BB+', the trustee and the servicer will be required to identify an eligible back-up servicer.
  
• If Standard & Poor's long-term rating on the servicer is lowered to 'BB', the trustee will be required to enter into a back-up servicing agreement, which will require the back-up servicer to review each servicer report and verify the calculations therein, and to perform certain monitoring and compliance functions with respect to the loans.
  
• If the servicer's rating is lowered to 'BB-', in addition to the above duties, the back-up servicer also will be required to develop and maintain the capability to process and make collections on the loans.
  
• In the event of a servicer default, the back-up servicer will assume and undertake the obligations of the servicer to service the loans, and will commence servicing the loans within 30 business days.

Surveillance.
Continual surveillance will be maintained on the transaction until the notes mature or are otherwise retired. The issuer will be required to provide regular periodic reports detailing the performance of the underlying collateral, the correlation between Standard & Poor's rating scale and Shinsei Bank's internal rating system, and the proper use of Standard & Poor's Trading Model.

Structural and Legal Analysis
This transaction is a CLO using a master trust structure. Shinsei is the trustor of the Master Trust and the transferor of the loans to the Master Trust. Shinsei Trust, a bank created under the laws of Japan, is the trustee of the Master Trust.

The Master Trust, in consideration for receiving the loans, issued to Shinsei Bank, on behalf of the Master Trust, the Series 2001-1 and Series 2001-2 investor certificates, which along with the seller's interest (see next section below), represent the beneficial interest in the Master Trust. Pursuant to the certificate purchase agreement, Shinsei Bank then issued and sold the Series 2001-1 and 2001-2 class A certificates to the issuer, which represent a portion of the interest in the Series 2001-1 and Series 2001-2 investor certificates. The issuer will acquire the Series 2001-1 and Series 2001-2 class A certificates in exchange for the net proceeds from the offering of the Series 2001-1 and Series 2001-2 class A notes. The Series 2001-1 and Series 2001-2 class A certificates will serve as collateral for the Series 2001-1 and Series 2001-2 class A notes and are the primary source of payment of interest and principal on the Series 2001-1 and Series 2001-2 class A notes.

The Master Trust was established for the following purposes:

• Acquiring the loans from Shinsei Bank;
  
• Creating Shinsei Bank's undivided beneficial interest in the Master Trust which was given by the Master Trust in exchange for Shinsei's assignment of the loans;
  
• Issuing the Series 2001-1 and Series 2001-2 investor certificates and each additional series of investor certificates;
  
• Entering into the swap agreement and any additional swap agreements in connection with other series of investor certificates; and
  
• Other activities related to the above.

Shinsei Trust is required to perform certain obligations on behalf of the Master Trust, including enforcing and exercising the rights of the Master Trust with regards to each of the loans included therein. Shinsei Bank's interest will fluctuate over time following changes in the pool characteristics, including, but not limited to, substitution of new loans, repayment and reinvestment of proceeds, recoveries, or defaults.

When issuing each series of notes, the Master Trust will have issued separate certificates from the trust that will back each series of notes issued by the issuer, Shinsei Funding One Special Purpose Co. The certificates will serve as collateral for the rated notes and are the primary source of payment of interest and principal. Each certificate will be purchased by the issuer which is a tokutei mokuteki kaisha (TMK), a Japanese special-purpose company which in turn will issue each series of rated notes. The issuer is a special purpose vehicle that complies with Standard & Poor's criteria for bankruptcy-remoteness. While the TMK is a Japanese entity, the indenture is governed by New York law.

Seller's Interest
Shinsei Bank received an undivided beneficial interest, or seller's interest, in the Master Trust in exchange for assigning the initial loans to the trust. During each monthly period, a share of the collections received during the preceding monthly period will be allocated to Shinsei Bank as holder of the seller's interest as discussed below.

This interest is based on, among other things, the aggregate outstanding principal balance of the loans, excluding defaulted loans and the adjusted invested amount of each series of investor certificates. The adjusted seller's interest which serves as a floor for the seller's interest, will be reduced by amounts in the portfolio allocated to the seller's interest as a result of overconcentration, and certain principal amounts related to loans in the portfolio that may be subject to set off by the borrowers. If the adjusted seller's interest is less than 5% of the adjusted invested amount of all series, principal proceeds that may otherwise have been distributed to Shinsei Bank will be retained in the principal funding account as discussed below in the allocation of principal section.

Allocation of Cash Flows
The amounts allocated to the class A certificates issued by the Master Trust will be the primary source of payment of interest on and principal of the respective class A notes being offered to investors. On each certificate payment date, the payments on the class A certificates will be remitted for application on the corresponding note payment date with: (i) the interest paid on the class A certificates being applied to pay the accrued interest on the class A notes; and (ii) if it is an expected principal payment date or any note payment date thereafter (or if an early amortization event or partial early amortization event has occurred), the principal paid on the class A certificates being applied to pay principal of the class A notes on that date.

Below is a discussion of how and when the interest and principal generated on the loans in the Master Trust will be allocated for payment to the class A, class B and class C certificates. Amounts paid to the holder of the class B and class C certificates will not be available to make payments on the class A notes.

Allocation of principal.
Proceeds from the scheduled repayment or proceeds from the prepayment of principal on the underlying collateral will be allocated to a single principal funding account upon the occurrence of certain events. These events include the aggregate maturity allocation percentage falling below 110%, the adjusted seller's interest falling below a certain threshold, the occurrence of an early amortization event with respect to a series, or the existence of a shortfall in any reserve account established in connection with any series.

In the case of an early amortization event, principal collections equal to the adjusted invested amount of the series in early amortization will be allocated to the principal funding account. In other cases, the amount necessary to satisfy the threshold requirements for the aggregate maturity allocation percentage (AMAP) test or the minimum adjusted seller's interest test, or in the case of a reserve account shortfall, the amount equal to such shortfall, will be retained in the principal funding account. The remaining collections will be released to Shinsei Bank.

The AMAP test is designed to compare principal collections that are scheduled to be received prior to any expected certificate principal payment date against the aggregate amount of principal scheduled to be paid in connection with all series of certificates on or prior to that expected certificate principal payment date. Thus, the aggregate maturity allocation percentage is a measure of the ability of the trust to cover the payment of principal on the related certificates on the expected certificate principal payment date. By requiring the aggregate maturity allocation percentage to be at least equal to 110% in respect of each expected certificate principal payment date to the extent of funds available to be deposited in the principal funding account, the transaction is expected to be able to make scheduled payments of principal on each series of certificates even if the underlying collateral experiences certain levels of defaults.

Amounts will be withdrawn from the principal funding account to cover any interest shortfall on a pro-rata basis among series; then to make scheduled payments on the certificates; then, if an early amortization event occurs with respect to any series, to make payments of principal thereon after satisfaction of the AMAP test. The amounts withdrawn from the principal funding account will be deposited in the series principal collection account, and allocated on a sequential basis among the class A, class B, and class C certificates. In addition, interest collections may be reallocated to cover defaults on the underlying collateral allocated to the series or to restore any principal amounts that may have been charged-off. To the extent the remaining amounts in the funding account are sufficient to satisfy both the AMAP and minimum seller's interest tests, any excess may be released to Shinsei Bank by the Master Trust.

Those amounts in the principal funding account allocated to cover an interest shortfall in a given series may be used to pay off the entire amount of the shortfall on a class A certificate, while certain conditions must be satisfied before such reallocated principal collections may be used to cover the interest shortfall on a class B certificate of such series.

Allocation of interest.
Interest proceeds received on the underlying loans will be allocated among the outstanding series according to the relative invested amount of each series. This amount plus the respective default allocation of any recovery and any net amounts received from the swap counterparty will be deposited into the series interest collection account. To the extent that excess interest collections exist with regard to other series, such excess may also be used to address any interest shortfall on the certificates. In addition, to the extent of an interest shortfall on the certificates, principal collections on the series may be reallocated.

The amount so allocated to this series will first be used to pay the series' allocated portion of both the trust expenses (subject to a cap on the size of these expenses) and the servicing fee. After scheduled swap payments, the class A and class B certificates will be paid accrued interest on a sequential basis. After this payment, the interest collections may be reallocated for distribution as principal proceeds for this series as discussed above. Following such reallocation, remaining amounts will, subject to a cap, be deposited in a reserve account used to cover any interest shortfalls on the certificates of this series to the extent of the funds in such reserve account. Interest not yet allocated will then be used to pay any swap termination payments, and then to cover expenses that exceeded the cap discussed above and were not paid senior in the priority of payments. Any remaining amounts will be deemed to be excess interest collections and will be used to cover shortfalls in interest collections for other series to the extent necessary, or will be distributed to the class C certificate holder.

Partial amortization and early amortization.
If a partial early amortization event, an early amortization event or an acceleration of the Series 2001-1 and 2001-2 notes following an event of default occurs, principal of the Series 2001-1 and 2001-2 notes may be paid prior to the expected principal payment date.

A partial early amortization will occur if the excess funds on deposit in the principal funding account exceed 20% of the sum of the aggregate outstanding principal balance of the loans held by the Master Trust (excluding any defaulted loans) and the excess funds on deposit to pay principal on the payment date or within six months following that payment date. Upon a partial early amortization event, an amount equal to the excess will be used to redeem one or more classes of certificates on the payment date based upon the order in which principal of such classes were originally scheduled to be paid.

Early amortization events include the following:

• The available credit enhancement falls below the required minimum;
  
• An event of default by Shinsei Bank under the interest rate hedge agreement;
  
• Certain parties fail to perform under the specific agreements; and
  The occurrence of certain events of insolvency, conservatorship, or receivership of Shinsei Bank.

Upon an early amortization event, the classes of certificates will be repaid sequentially every month from all available principal proceeds after satisfaction of the AMAP test.

Allocation of defaults.
Losses on defaulted loans will generally be allocated using the series allocation percentage. This percentage will be modified in accordance with certain maximum concentration percentages established with regard to the portfolio to determine if there is an overconcentration of loans sharing certain characteristics as of any particular date. These percentages will be applied to limit the effect of an overconcentration of defaulted loans from particular borrowers, groups of borrowers in the same category under Shinsei Bank's internal credit rating system, and groups of borrowers in the same Standard & Poor's industry classification. The transaction requires that a higher percentage of the losses on a defaulted loan be allocated to the seller's interest if there is an overconcentration of loans sharing the same characteristics as the defaulted loan and that the adjusted seller's interest be reduced to reflect overconcentrations of loans sharing the same characteristics.

In addition, the portion of any defaulted loan that would otherwise have been allocated to a series, will instead be allocated to and will reduce the Seller's Interest if the loan was transferred:

• With an internal rating category below a stated threshold;
  During the existence of an early amortization event (for so long as such event continues); or
  
• After the amount of new loans exceeds 5% in any monthly period (but only until Standard & Poor's Trading Model has been run with respect to the transferred loans).

Swap agreement.
As the underlying collateral may pay interest on a different basis to the notes, the trust will enter into an interest rate swap agreement with Deutsche Bank AG, Tokyo Branch for the exclusive benefit of the holders of the Series 2001-1 and 2001-2 investor certificates.

The swap agreements will have a notional amount as of each swap payment date equal to the adjusted invested amount of the Series 2001-1 and 2001-2 investor certificates as of the preceding transfer date after giving effect to any change to the invested amount of the Series 2001-1 and 2001-2 investor certificates on that date. The swap payment date will be the business day preceding each transfer date.

On each swap payment date, the swap counterparty will pay a floating-rate payment on the notional amount based on the three-month yen LIBOR plus 1.50% per annum, adjusted to reflect scheduled interest payments that were due and unpaid in the related monthly period and any recoveries of such scheduled interest payments; and the trust will pay the applicable series' allocation of interest collections received on any date during the preceding monthly period.

The trust may not amend, terminate, or enter into a new swap agreement unless Standard & Poor's has confirmed its rating on the notes.

If the swap counterparty's credit rating ceases to be at the levels required to maintain the then-current ratings assigned to the Series 2001-1 and 2001-2 class A notes by Standard & Poor's or if the swap counterparty's credit support, if any, is no longer adequate to maintain such ratings, the trust may terminate the swap agreement unless the swap counterparty performs any of the following, to maintain the ratings assigned to the Series 2001-1 and 2001-2 notes:

• Delivers or posts sufficient collateral;
  
• Assigns the swap agreement to an eligible substitute counterparty; or
  
• Establishes other arrangements, including collateral arrangements, guarantees or letters of credit that are satisfactory, in each case.