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Rating Action:

MOODY'S RATES DBS ASSET MANAGEMENT'S SYNTHETIC CDO DEAL Aaa

23 May 2003
MOODY'S RATES DBS ASSET MANAGEMENT'S SYNTHETIC CDO DEAL Aaa

US$95 Million of Asset-Back Securities Rated.

Hong Kong, May 23, 2003 -- Moody's Investors Service assigned its long-term Aaa credit rating to the Class A floating rate mezzanine notes issued by Merlion CDO 1 Limited. At the same time, Moody's assigned a Aa2 rating to the Class B floating rate mezzanine notes, an A2 rating to the Class C floating rate mezzanine notes and a Baa2 rating to the Class D floating rate mezzanine notes. The current transaction is a managed synthetic collateralised debt obligation transaction and has been brought to market jointly by J.P. Morgan (S.E.A.) Limited and The Development Bank of Singapore Limited. Moody's did not rate the US$30 million subordinated notes. The complete rating action is as follows:

Issuer: Merlion CDO 1 Limited

US$50,000,000 Class A Floating Rate Mezzanine Notes due 2010, rated Aaa

US$15,000,000 Class B Floating Rate Mezzanine Notes due 2010, rated Aa2

US$10,000,000 Class C Floating Rate Mezzanine Notes due 2010, rated A2

US$20,000,000 Class D Floating Rate Mezzanine Notes due 2010, rated Baa2

The ratings are based upon, among other things, the following:

1. the credit quality of the underlying reference entities;

2. the diversity among the underlying reference entities;

3. the CDS premiums payable to the issuer by JPMorgan Chase Bank, London branch (Aa3/P-1 for its head office rating) (JPM) as the credit default swap counterparty;

4. the credit quality of the collateral securities -- US$125 million Oeffentlicher Pfandbriefe due June 4, 2010 and issued by Landesbank Baden-Württemberg (Aaa/P-1);

5. the credit quality of The Development Bank of Singapore Limited (Aa2/P-1) (DBS) as the collateral securities forward counterparty;

6. the credit quality of JPM as the asset swap counterparty;

6. the loss allocation arrangement in the credit default swaps (the CDS);

7. the experience of DBS Asset Management Ltd (DBSAM) as the portfolio manager; and

8. the legal and structural integrity of the transaction.

Although the scheduled maturity date of the notes is in June 2010, owing to the potential delay in principal redemption on the notes due to the settlement mechanism in the CDS, the ratings assigned address the timely payments of interest on or before the scheduled maturity date in June 2010 and the ultimate principal payment of the notes at par by the legal final maturity date in November 2010.

Moody's ratings only address the credit risks associated with the transaction. Other non-credit risks, such as those associated with the timing of principal prepayments, have not been addressed and they may have a significant impact on the yield to investors.

TRANSACTION SUMMARY

In this transaction, the issuer used the US$95 million rated notes proceeds and the US$30 million unrated subordinated notes proceeds to acquire US$125 million Oeffentlicher Pfandbriefe due June 4, 2010 issued by Landesbank Baden-Württemberg (Aaa/P-1). To address the interest rate mismatch between the notes and the collateral securities and the potential market value risk in liquidating the collateral securities under the early redemption of the notes, the issuer entered into an asset swap and a collateral securities forward agreement with JPM and DBS respectively.

In addition to the collateral securities, the issuer also entered into one hundred CDS with JPM as of the closing date. Each CDS is referenced to one reference entity with a notional amount of US$10 million. Under the CDS, the issuer sells credit protection to JPM. The issuer will, in turn, receive a quarterly CDS premium from JPM for each of the CDS. If credit event occurs in relation to a reference entity, the issuer is obligated to pay a cash settlement amount to JPM on the scheduled maturity date under the CDS. Such cash settlement amount will be determined at the completion of a bid quotation process.

The issuer has appointed DBSAM as the portfolio manager of the transaction. Subject to certain trading and portfolio criteria, DBSAM is authorised to terminate existing CDS or to enter into new CDS on behalf of the issuer with JPM as the credit default swap counterparty. The issuer will book all the CDS trading gain/loss arising from the termination and/or addition of CDS and settle the net amount with JPM on the scheduled maturity date in accordance with the payment waterfall.

Cash settlement amounts and net trading loss will first be absorbed by the subordinated note investors. When the aggregate of all the cash settlement amounts and net trading loss exceeds US$30 million, any additional loss will then be allocated to the mezzanine note investors on a sequential basis according to reverse seniority order of the notes with Class A notes as the most senior class. The maximum amount of loss allocated to each class of notes will be capped at their respective initial principal amount.

Interest on the notes is payable quarterly and is calculated based on the outstanding principal balance of each class of the notes. The issuer will write down the outstanding principal balance of the relevant class of notes by an amount equal to the cash settlement amount allocated to such class of notes during the term of the transaction on each payment date. To the extent when the actual cash settlement amount of the reference entity which has triggered a credit event has not been finalised as of the payment date, for the purpose of calculating the interest amount payable to the noteholders, the to-be-determined cash settlement amount will be deemed to be equal to the notional amount of such reference entity. When the actual cash settlement amount is subsequently determined, the outstanding principal balance of the notes will be adjusted accordingly. Meanwhile, an additional interest amount --- equal to the difference between the interest actually paid to the noteholders and the interest that would have been paid to the noteholders --- will then be payable by the issue to the respective noteholders.

Principal redemption of the notes is expected to be on the scheduled maturity date in June 2010. However, if there are any unsettled credit events as of the scheduled maturity date, a portion of the principal repayment of the notes will then be withheld until the actual cash settlement amount is determined. The last principal redemption of the notes is expected to be paid out on or before the legal final maturity date on November 21, 2010.

A more detailed analysis of the transaction will soon be available at Moody's web site in the New Issue Reports section: http://www.moodys.com.

THE COMPANIES

The issuer is a special-purpose, bankruptcy-remote company recently incorporated in the Cayman Islands. DBSAM is the portfolio manager of the transaction. DBSAM, a wholly owned subsidiary of Development Bank of Singapore Limited, was incorporated in Singapore in 1982 and was authorised under the Monetary Authority of Singapore as an investment management company. As at March 31, 2003, DBSAM had approximately S$6 billion of assets under management. DBSAM manages both fixed income and equity products, with particular expertise in global fixed income and Asian equities.

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.

Hong Kong
Michael M. Ye
Managing Director
Structured Finance Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165

Hong Kong
Jerome Cheng
Vice President - Senior Analyst
Structured Finance Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165

No Related Data.
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