Credit Guarantee Facilities Applied in Structured Finance in Ex-Japan Asia Presented by: Li Ma VP-Senior Analyst Structured Finance Group Hong Kong Presented by: Li Ma VP-Senior Analyst Structured Finance Group Hong Kong Shanghai May 31, 2006

Agenda The Role of Credit Enhancement (CE) in Structured Finance Applications of Credit Guarantee Facilities in ex-Japan Asia Case Studies – Fully-supported Structure – Partially-supported Structure

The Role of Credit Enhancement

Role of CE in Structured Finance Structured finance is NOT a way to remove credit risk, but a way to re-allocate credit risk through a particular capital “Structure” An important step in structuring a securitization transaction is determining the adequate level of CE which – Protects investors against loss when there is loss in the underlying collateral – Brings the credit quality of the transaction to the desired rating

Determining the Amount of CE Based on the frequency, severity and timing of future losses on the collateral – Use of historical data to estimate future losses – Determine overall credit risk based on credit strength of the underlying assets Based on the credit quality of the transaction party and the transaction structure to determine the timeliness of the CE availability

Types of CE Internal – Overcollateralization – Senior/Subordinated Structure – Excess Spread / Excess Collection – Cash Reserve External – Interest / FX Swaps – Political Insurance – Payment / Recovery Guarantee

External CE Amount of Enhancement – Fully-supported Structure Stand-by fully supported structure Direct-pay fully supported structure – Partially-supported Structure Thailand: EGAT Philippines: PSALM

The Applications of Credit Guarantee Facilities

Fully-Supported Structure Security Default = 3 rd Party Default + Insufficient funds from collateral to pay off investors as promised (“two-party pay”) Severity of loss is likely to be lower in the event of default Rating of security depends on: – Quality of assets and the support provider – Correlation of asset quality with the fortunes of the 3 rd party – Possible that the final rating will be higher than that of the 3 rd party due to joint default probability

Partially-Supported Structure 3 rd Party only provides credit support – when certain conditions are met – during certain period – up to certain amount Rating of security depends on: – Quality of assets and the support provider – Correlation of asset quality with the fortunes of the 3 rd party – Rating of security may fluctuate over time

Providers of Credit Guarantee Facilities Monoline insurers – FSA, MBIA, AMBAC, XLCA, etc. Highly rated financial institutions Highly rated corporations Supranational organizations – World Bank, ADB, etc. Swap Provider, Recovery Guarantee, etc.

Benefits of Credit Guarantee Facilities For Investors – Increase investor confidence in the underlying securities, especially those from new markets – Alternative investment choices For Issuers/Originators – Increase the credit quality/rating of the underlying security – Allows the rating of the transaction to be higher than the “country ceiling” For Guarantors – Guarantee fee income – Market / portfolio / risk diversification Macro-economy – Speed up the implementation of structured finance/alternative financing options in new market

Applications of Credit Guarantee Facilities in Ex-Japan Asia (1/3)

Applications of Credit Guarantee Facilities in Ex-Japan Asia (2/3)

Applications of Credit Guarantee Facilities in Ex-Japan Asia (3/3)

Case Studies

Fully-supported Structure (1/3) Hsinchu RMBS Transaction Structure Diagram

Fully-supported Structure (2/3) Hsinchu RMBS Transaction – Originator: Hsinchu Int’l Bank (Not Rated) – Taiwan’s Foreign Currency Ceiling: Aa3 – Notes Rating (without Guarantee): Aa3 – Notes Rating (with Guarantee): Aaa – Guarantor: AMBAC – Guarantor’s Rating: Aaa

Fully-supported Structure (3/3) Due to both internal credit enhancement and external 3 rd party guarantee, the rating of the notes is – The same as the guarantor’s rating – Higher than the originator’s rating and – Pierces Taiwan’s foreign currency ceiling The guarantee covers: – Full and timely interest payment of the notes – Ultimate repayment of principal by the notes’ legal maturity date – Notes issuer's payment obligation under the cross- currency swap

Partially-supported Structure (1/4) EGAT Bonds Structure Diagram

Partially-supported Structure (2/4) EGAT Transaction – Issuer: Electricity Generating Authority of Thailand (Not Rated) – Thailand’s Foreign Currency Ceiling (1998): Ba1 – Bonds Rating (with Guarantee in 1998): A3 – Bonds Rating (2006): A1 – Guarantor: World Bank & Kingdom of Thailand – Guarantor’s Rating: Aaa & Ba1 (1998)

Partially-supported Structure (3/4) Due to the 2 guarantees provided by two 3 rd parties, the rating of the bonds is – Higher than the originator’s rating, – Pierces Thailand’s foreign currency ceiling, but – Lower than one of the guarantors at the beginning, – Will gradually migrates towards the World Bank’s rating as time passes

Partially-supported Structure (4/4) The Kingdom of Thailand full guarantee unconditionally and irrevocably covers: – Full and timely interest payment of the bonds The World Bank partial guarantee unconditionally and irrevocably covers: – One period of interest payment of the bonds (rolling) – Full repayment of principal at the bonds’ maturity date

Q & A

Contacts NameTitlePhone No. Min Ye Managing Director X122 Jerome Cheng VP/Senior Credit Officer Myrna Fajardo VP/Senior Credit Officer Marie Lam VP/Senior Analyst Li Ma VP/Senior Analyst Elaine Moody’s Beijing

The FX Country Ceiling of Major Asian Markets (May, 2006)