Cosmos Bank George & Mary Cash Card 2003 Securitization

Analysts:
Diane Lam, CFA, Hong Kong
Jerry Fang, Taipei
Clementine Kiang, Taipei

This report does not constitute a recommendation to buy, hold, or sell securities.

Rating Details

New Ratings

Profile

Rationale
Taiwan Ratings Corp. assigned its 'twA' rating to NT$1.19 billion Excess Spread Right certificates (ESRs) issued by Cosmos Bank George & Mary Cash Card 2003 Securitization Special Purpose Trust (SPT). This is the first transaction with a revolving structure under the Financial Asset Securitization Law of Taiwan.

The ratings address the full and timely payment of interest and the ultimate full repayment of principal by the transaction's legal final maturity date of January 2010.

The ratings are based on:

• The assessment of the credit risk associated with the overall quality of the underlying pool based on Cosmos Bank's historical portfolio performance;
• The sound payment structure and cash flow mechanics of the transaction;
• The ESR reserve is to be established and funded by excess interest during the first three months of the revolving period;
• Conservative cash flow analysis, which stresses default rates, principal rates, and interest income of the pool.

Originator/Servicer
Cosmos Bank (twBBB-/Stable/twA-3) was established in 1992. On June 30, 2003, the bank reported total assets of NT$224.1 billion, of which credit extended through George & Mary Cash Cards, its flagship product, contributed NT$64 billion or almost 30% of total assets. Cosmos Bank has benefited significantly from its cash card business, which was launched in 1999, in terms of both business and financial profile. As a first mover in the cash card segment, Cosmos Bank has achieved a strong position in this fast growing niche market and is expected to maintain its leading position over the medium term.

Transaction Overview
The transaction is the securitization of cash card receivables under Cosmos Bank's George & Mary Cash Card program. Cosmos Bank transferred Taiwan dollar denominated eligible receivables arising from eligible loan accounts to the receivable trustee. The receivable trustee then issued four types of certificate denominated in Taiwan dollars: investor certificates, ESRs, seller certificates, and subordinated seller certificates.

The investor certificates were sold to G&M Finance Ltd., a Cayman Islands-based special purpose vehicle (SPV). The SPV issued U.S. dollar denominated notes overseas (rated 'AA-' by Standard & Poor's), secured by a first fixed charge on its assets, including the foregoing investor certificates.

The ESRs were placed privately in Taiwan. They rank junior to the investor certificates, but senior to the subordinated seller certificates.

Unlike previous collaterialized loan obligations issued in Taiwan, this transaction is a revolving structure whereby during the first six months after closing, the SPT will use principal collected to purchase eligible receivables {** the credit support is fixed at 23%**}. As the portfolio of cash card receivables is expected to generate excess spread immediately after closing, the reserve fund designated solely to support ESRs will be funded according to waterfall from excess spread.

The seller certificates rank pari passu with the investor trust amount (i.e. the sum of the investor certificates and subordinated seller certificates) and serves to absorb fluctuations in available receivables and any dilution in the receivables. The seller certificates and subordinated seller certificates are retained by Cosmos Bank.

ESR reserve
The ESR reserve, established during the first three months of the revolving period is a form of fungible liquidity and credit support for the ESRs. The ESR reserve may be used to meet interest payments on the ESRs or to meet any shortfalls in the expected ESR repayment schedule, or in case of early amortization, it may be used to repay the ESRs' principal in full.

Other reserves
As seen in other structured finance transactions, a servicer transition reserve is funded at closing. This reserve will cover the liquidity needs of the investor certificates and the ESRs during a servicer transition.

Payment Structure
Interest payment priority
All interest collections will be separated into investor interest (represented by investor certificates and subordinated seller certificates) and seller interest according to a pre-defined percentage. The waterfalls vary slightly under different periods. Interest collections available to the investor interest will be used to pay mainly taxes, senior fees and expenses, interest for investor certificates. After meeting such prior payments, the residual, or excess spread interest is used to repay ESR interest and ESR principal.

Principal payment priority
All principal collections will be separated into investor interest and seller interest according to a pre-defined percentage. During the first six-month revolving period, principal collections available for investor interest, after the payment of senior expenses, will be used to purchase new eligible receivables. After the revolving period, the transaction will enter into a 5.5-year amortization period. During the non-revolving periods (including amortization period and early amortization period), and after the payment of senior expenses, the remaining principal collections are used to redeem the ESRs after the investor certificates are repaid in full.

Collateral
Eligible accounts are required to conform to certain criteria, including, but not limited to, the following:

• The account must have been seasoned for at least 24 months;
• The obligor may not be a student, self employed, or employed by Cosmos;
• The facility limit and outstanding balance may not exceed NT$500,000;
• The account may not have been past due by 30 days in the 24 months preceding the cut-off date, and may not have been past due by 10 days more than two times in the 24 months preceding the cut-off date;
• The account may not have been subject to any prior restructuring, or have been re-aged;
• The account must have a minimum yield of 15%; and
• The account must have a minimum payment rate of 3%.

The portfolio is also limited to certain pool characteristics such as:

• A maximum 8% exposure to accounts with credit limits of NT$400,000-NT$500,000, and
• A maximum 25% exposure to accounts with average monthly payment rates of less than 6%.

Credit Analysis
Credit analysis was conducted by reviewing historical monthly dynamic data dating back to January 2000 provided by Cosmos Bank. Credit assessment and cash flow tests were based mainly on the following elements.

Default
Based on the historical data provided by Cosmos Bank, Taiwan Ratings arrived at a conservative base default rate. Appropriate stresses then were applied to the base default rate and reflected in the cash flow analysis.

Principal payment rate
The principal payment rate is defined as monthly principal collections over the beginning balance of the total outstanding receivables in each collection period. The principal payment rate is crucial in revolving loan securitization. The faster the principal of the receivables is repaid, the shorter time that the deal is exposed to losses, and consequently less credit support is required. Various levels of principal payment were derived from Cosmos Bank's historical data and applied in cash flow tests.

Portfolio yield
Portfolio yield is defined as the total interest income of the portfolio divided by total outstanding receivables. The portfolio yield of the pool was stress tested at various levels to take into account likely price competition.

Structural Analysis
Cash flow allocation
The servicer will collect proceeds from the borrowers and deliver them to the trust collection account within two days. The receivables trustee will distribute these monies to the seller and investors in accordance with prescribed percentages, and will further distribute them as per the transaction waterfall.

Negative carry risk
During the first six-month revolving period, the transaction might be exposed to negative carry risk if sufficient receivables can not be purchased by the SPT and the deal holds too much cash. However, such risk is minimal and no additional credit enhancement is required in view of Cosmos Bank's current book of receivables and the fact that the revolving period is short. Additionally, an excess spread trigger is set to force early amortization should the deal have too much cash.

Servicer transition risk
Cosmos Bank will act as the servicer for the transaction. Should a servicer termination event occur, and in turn the initial servicer needs to be replaced, the back-up servicer will require up to 60 days from the date of its appointment to prepare to fully act as a servicer. But it will undertake to deliver notices to redirect obligors' payments as soon as possible and within 10 days from receipt of the relevant information. An appropriate amount of cash reserves will be funded at closing to mitigate the risk from a temporary interruption of cash flow to the deal.

Commingling risk
The servicer is obligated to remit collections into the trust collection account within two days of receipt. As such, the transaction is exposed to commingling risk, in the event that the servicer becomes insolvent while holding the proceeds collected for the SPT. Commingling risk will be mitigated through credit enhancement.

Set-off risk
As Cosmos Bank is a deposit-taking institution, the obligors may have deposits with the bank. Those obligors have the right to offset their debts with their deposits held by Cosmos Bank. The setoff risk will be crystallized at closing with public notification.

In terms of risk mitigation, the transaction documents require Cosmos Bank to pay the trustee in the event that borrowers exercises their set off right. Should Cosmos become insolvent or fail to remit funds to cover setoff, the trustee can exercise a setoff against Cosmos by using monies which would otherwise have been remitted to Cosmos under the seller waterfall.

Dilution
Dilution is used to refer any non-cash reduction to a receivable balance that is not attributable to default or write-off. The return of a product purchased with a credit card is a typical example of dilution. Because the George & Mary Cash Card is a cash card instead of a credit card, dilution risk will not arise due to product returns. Nevertheless, it may occur as a result of fraud.

Dilution will be sized dynamically and funded through the seller certificates. The minimum amount of the seller certificates is set at 10% of eligible receivables. Moreover, dilution due to fraud will be moderated by Cosmos Bank's self-auditing system and frequent review of its operation process.

Legal and Tax Analysis
Perfection of assets under a revolving structure
The transaction is structured in accordance with the Financial Asset Securitization Law of Taiwan, and is the first one with a revolving structure in the underlying pool in Taiwan.

The originator entrust accounts to the receivable trustee in good faith. The entrustment was perfected with three consecutive days of public notifications in newspapers before the transfer date as required under the law. New receivables generated by those designated accounts will be covered by such notification. During the revolving period, rights to new receivables created under additional accounts will be similarly entrusted and transferred with public notifications.

Bring-down opinions
For transactions with revolving structure like this deal, the periodical delivery of bring- down opinions (subsequent opinions stating that subsequent transfers are true sales and perfected) and solvency certificates are necessary. In this transaction, the delivery of such opinions and certificates is required at each entrustment of additional accounts. Such steps are crucial to ensure that entrustment creates legitimate assets for the trust.

Taxes
ESR investors will be paid their interest net of a 6% withholding tax.