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Rating Action:

MOODY'S ASSIGNS PROSPECTIVE RATINGS TO STANDARD CHARTERED BANK'S PROPOSED SYNTHETIC CLO DEAL

09 Jun 2006
MOODY'S ASSIGNS PROSPECTIVE RATINGS TO STANDARD CHARTERED BANK'S PROPOSED SYNTHETIC CLO DEAL

Approximately US$182.4 Million of Proposed CLO Securities Rated

Hong Kong, June 09, 2006 -- Moody's assigned prospective rating of (P)Aaa to the Class A notes issued by Start II CLO Limited. The proposed transaction is a balance sheet synthetic CLO transaction sponsored by Standard Chartered Bank (SCB) and co-arranged by Lehman Brothers and SCB. At the same time, Moody's assigned prospective ratings of (P)Aa2 to Class B notes, (P)A2 to Class C notes, (P)Baa2 to Class D notes and (P)Ba1 to Class E notes issued by Start II CLO Limited respectively. This is SCB's second synthetic CLO issuance of its wholesale bank portfolio.

The complete rating action is as follow:

Issuer: Start II CLO Limited

US$[108] million Class A credit-linked floating rate notes due [June 2012], rated (P)Aaa;

US$[24] million Class B credit-linked floating rate notes due [June 2012], rated (P)Aa2;

US$[20] million Class C credit-linked floating rate notes due [June 2012], rated (P)A2;

US$[15.2] million Class D credit-linked floating rate notes due [June 2012], rated (P)Baa2; and

US$[15.2] million Class E credit-linked floating rate notes due [June 2012], rated (P)Ba1.

The prospective ratings are assigned based on information of the portfolio of reference obligations, the expected structure and credit tranching as of 8 June 2006. The final ratings are subject to finalisation of the portfolio and the structure.

In assigning the prospective ratings, Moody's considered the following:

- The credit quality and diversity of the reference portfolio;

- The governing ISDA documentation;

- The level of subordination for the different classes of notes;

- The collateral being placed in cash deposits; and

- The structure of the transaction including the early redemption, enforcement date and early termination.

PROPOSED TRANSACTION SUMMARY

On closing date, SCB, as the swap counterparty, will enter into a CDS with the issuer, Start II CLO Limited, related to a portfolio of corporate loans (reference portfolio) that meets certain criteria as to creditworthiness and diversity. The issuer is expected to place all proceeds of the notes into cash deposits with [Deutsche Bank].

There will be a replenishment period of three and a half years in which SCB can replenish the exposures of certain names that have amortized or replace these names with new ones, both subject to the replenishment criteria being met.

Interest on the notes will be paid quarterly, while principal repayments on the notes can occur prior to the initial redemption date depending on (i) amortization of the underlying loans, (ii) occurrence of early redemption date, (iii) occurrence of enforcement date or (iv) designation by the swap counterparty of a regulatory change.

Five rated classes of notes will be issued. Upon settlement of a credit protection payment, if the cumulative losses exceed the 3.6% threshold amount, the outstanding principal amounts of the notes will be written down by the same amount in reverse alphabetical order of the notes starting from Class E notes, followed by Class D notes, Class C notes, Class B notes and Class A notes sequentially. As loans are amortized the notes will be repaid according to seniority with Class A notes being paid first and so forth. However, as the issued amount only makes up approximately 11% of the total portfolio with a large super senior tranche ahead of the Class A note, it is not expected that there will be any amortization of the notes prior to the scheduled maturity date.

At closing, the proceeds of the notes are expected to be held in cash deposits in the principal collection account at [Deutsche Bank]. Interest earned on the deposits will be used to cover part of the interest expense on the notes. As cash settlements or amortization of the notes occur, the cash in the account will be used to pay the counterparty in the former case and the note holders in the latter case. However, there will also be a collateral switch agreement at closing whereby the swap counterparty can, in the future, instruct the issuer to enter into a repurchase agreement (the form of which will be approved by all parties at closing). At that time, cash deposits being held in the principal collection account will be used to purchase eligible securities from the repo counterparty.

THE REFERENCE PORTFOLIO

As of 8 June 2006, the proposed initial portfolio has 174 reference obligations, and the total aggregate notional amount is approximately US$1.6 billion. The proposed initial portfolio has an Asian component of 55.4% and Hong Kong component of about 24%. Although the initial portfolio is distributed across 27 Moody's industry categories, the top four industries make up approximately 42% of the portfolio.

The transaction will have a three and a half year replenishment period whereby as loans are repaid, SCB has the option to replenish the same name in the portfolio or to add a new name so long as the replenishment conditions are met. Part of the replenishment conditions include passing the Moody's Manage-to-Model test. The replenishment period can also end if losses exceed [3.6]% of the initial portfolio notional amount or if defaulted amounts exceed [6]% of the initial portfolio notional amount.

MOODY'S ANALYSIS

Some of SCB's customers are not publicly rated by Moody's, therefore, Moody's used a quantitative mapping approach, and a qualitative review of SCB's internal rating process to give credit to those non-rated reference entities. Using the mapping approach, Moody's determined the credit quality of the initial portfolio is consistent with a weak Baa2 rating.

The mapped ratings, which provided the default probabilities, combined with historical recovery rates, were included into the CDOROM which models each reference obligation individually with a standard multifactor model, incorporating intra- and inter-industry correlations. In each Monte Carlo scenario, defaults and recoveries are simulated and cumulative losses were then derived on the portfolio which in turn were allocated to the different classes based on their priority of payments. By repeating this process and averaging across the number of simulations, an estimate of the expected losses borne by the notes were derived. These expected losses were then mapped to a rating to achieve the assigned provisional ratings.

THE COMPANIES

The issuer is a public limited company newly incorporated in the Cayman Islands. It has no previous operation and is a special purpose vehicle established solely for the purpose of entering into the current transaction. The proposed transaction is sponsored by Standard Chartered Bank (SCB) (A2/P-1). Standard Chartered PLC and its consolidated subsidiaries (Group) is an international banking and financial services group focused on the markets of Asia, Africa and the Middle East. SCB is the main operating subsidiary of Standard Chartered PLC. The Group provides a wide range of financial products and services to its customers through two main business divisions, consumer banking and wholesale banking.

Moody's Investors Service is a publisher of rating opinions and research. It is not involved in the offering or sale of any securities, nor is it acting on behalf of the offering party. This release is not a solicitation or a recommendation to buy, hold or sell securities.

A more detailed analysis of the transaction is available at Moody's web site in the Pre-sale Reports section.

Hong Kong
Min Ye
Managing Director
Structured Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

Hong Kong
Myrna Fajardo
VP - Senior Credit Officer
Structured Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

No Related Data.
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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​​​​
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