12.12.2012 07:21
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Moody's assigns definitive ratings to SCB's unfunded CDS

USD368.55 million in CDS notional amount rated

Hong Kong, December 12, 2012 -- Moody's Investors Service has assigned definitive ratings to four tranches of an unfunded credit default swap (CDS) pursuant to the Trade Finance Transaction #10, where Standard Chartered Bank ("SCB") is the credit protection buyer and Standard Chartered Bank (Hong Kong) Limited is the credit protection provider:

....USD35 million A Tranche in relation to the 16% to 17% tranche, definitive rating assigned Aaa (sf)

....USD35 million B Tranche in relation to the 15% to 16% tranche, definitive rating assigned A1 (sf)

....USD228.55 million C Tranche in relation to the 8.47% to 15% tranche, definitive rating assigned A3 (sf)

....USD70 million D Tranche in relation to the 6.47% to 8.47% tranche, definitive rating assigned Baa3 (sf)

The ratings measure the risk, on an expected loss basis, that the credit protection provider will be required to make payments in respect of credit events under the terms of the transaction. The ratings also address any premiums due but not paid by the credit protection buyer, up until an early termination date, if any.

The ratings do not address the potential losses resulting from an early termination of the transaction, nor any market risk associated with the transaction.

Moody's ratings address only the credit risks associated with the transaction. Non-credit risks have not been addressed, but these may have a significant effect on the yields to investors.

RATINGS RATIONALE

This is a synthetic balance-sheet collateralized loan obligation (CLO) transaction. It aims to transfer the mezzanine credit risk (from 6.47% to 17%) of a USD3.5 billion reference portfolio to the credit protection provider. The transaction's legal maturity date is in about 4.5 years, and is scheduled to terminate about 1.5 years after the closing date if all credit events (if any) are settled, subject to any early termination events.

The reference portfolio will consist of corporate trade financing obligations that meet certain criteria with respect to creditworthiness and diversity. These obligations are initially originated by SCB and its affiliates mostly in Asia and other emerging market countries.

The credit protection buyer and provider had not executed the CDS contract, which deems the transaction as non-enforceable. However, Moody's has considered the presence of a parallel enforceable transaction, which is expected to share the same reference portfolio throughout the entire transaction term, but references the lower part of capital structure -- the detachment point of the parallel transaction equals the attachment point (6.47%) of the bottom tranche of the rated transaction.

Moody's has evaluated the legal integrity of the parallel transaction, as well as the presence of substantially similar terms and conditions and other features, including the identical portfolio shared by this proposed transaction and the parallel transaction.

Moody's will receive periodic reference portfolio reports and other transaction reports to monitor the credit risk of the portfolio and, hence, arrive at a rating. The parallel transaction is not rated by Moody's.

The credit protection provider will provide credit protection against the occurrence of credit events in the reference portfolio. Credit events in the transaction are defined as bankruptcy, failure to pay, and restructuring.

The occurrence of a credit event, the compliance to the eligibility criteria and replenishment conditions, as well as the computation of any losses, would be verified by the accountant of the transaction.

SCB can replenish loans or other exposures that have been paid or reduced with new exposures by adding new reference obligations or increasing the notional amount of existing reference obligations within the first 15 months from the closing date ("replenishment period"), subject to the satisfaction of eligibility criteria and replenishment conditions including (but are not limited to):

(1) reference obligations with low internal credit ratings not exceeding certain limits

(2) weighted average life of the portfolio is less than 91 days

(3) tenor of any reference obligation not exceeding 366 days

(4) concentration in each of the countries not exceeding the specified amounts

(5) concentration in each of the industries not exceeding the specified amounts

(6) reference entity not being recorded on SCB's early alert review system

(7) H -Score (a measurement of obligor concentration) not being lower than 200

For each defaulting obligation, the actual recovery will be received through the loan workout process in accordance with SCB's standard procedures. SCB will continue the workout process until it is formally concluded or the defaulted obligation is sold. If the workout process is completed before 60 business days prior to the legal maturity date, the loss amount for the defaulted obligation will be based on the actual recovery. Otherwise, it will be calculated based on the loan loss provision per SCB standard provisioning policy and/or the loss determined through the market value quotation process.

ANALYSIS

The main drivers of Moody's analysis of this transaction are:

(1) 5.4% annualized weighted average default rate assumption of the hypothetical reference portfolio -- Moody's has constructed a distressed hypothetical portfolio based on the eligibility criteria and replenishment conditions. The default rate assumption is primarily determined by credit mapping and stresses that Moody's applies as part of its rating methodology.

(2) 25% weighted average recovery rate assumption of the hypothetical portfolio.

(3) 5.7% weighted-average pair-wise asset correlation assumption of the hypothetical portfolio for simulating the default distribution.

(4) exposure limits to each country based on country ceilings and available credit enhancement to each tranche.

(5) attachment point and the detachment point for each of the four tranches.

(6) structure of the transaction, including the replenishment guidelines, cumulative default triggers, and the legal documentation.

The initial portfolio comprises about 10,950 reference obligations by 1,618 corporate reference entities. Most of the reference obligations are short-term senior unsecured loans.

Only a small portion of the reference portfolio will have Moody's public ratings. For the remaining portfolio, the credit quality of each of the reference entities is assessed based on a credit mapping between SCB's internal rating scale and Moody's public rating scale, which was last updated in May 2011. The initial reference portfolio has a weighted-average credit quality corresponding to a Ba3 rating based almost entirely on credit mapping.

In terms of geographical diversification, approximately 51% of the initial portfolio is concentrated in Asia, and the remainder in the Middle East and North Africa (18%), Europe (11%), Indian Subcontinent (11%). The top five countries are Hong Kong (15%), United Arab Emirates (15%), Singapore (11%), China (9%), and India (9%).

The top four industries in the initial reference portfolio were metals and mining (15%), wholesale (12%), oil and gas (12%), and beverage, food & tobacco (9%).

RATING METHODOLOGY

Moody's CDOROM model was used in conjunction with a separate cash flow model, Moody's ABSROM model, to measure the potential expected loss incurred by the credit protection provider in this transaction.

The CDOROM model performs a Monte Carlo simulation that uses Moody's default probability assumption as input. Each obligor is modeled individually, with a standard multi-factor model incorporating intra- and inter-industry correlations.

The correlation structure is based on the Gaussian copula. In each Monte Carlo scenario, defaults are simulated. The CDOROM model will generate the default distribution of the hypothetical portfolio. The default distribution generated by CDOROM will serve as input in the ABSROM.

The ABSROM can model: (1) the revolving nature of the portfolio, (2) the assumed loss for each default, (3) the loss allocation in accordance with the documented order of priorities, and (4) the effect of the cumulative default trigger to end the replenishment period before its scheduled date.

As such, the ABSROM model calculates the loss incurred by the credit protection seller under each default scenario, which, combined with the probability assigned by the CDOROM model to that default scenario happening, allows for the computation of the expected loss of each tranche.

The ratings for this transaction were assigned in line with Moody's existing methodology entitled "Rating Corporate Collateralized Synthetic Obligations," dated September 2009, and "Moody's Mapping Methodology for Bank Balance-Sheet CLOs," dated January 2011, and as further described above.

Moody's released a press release on 12 October 2012 stating its plans to update certain assumptions used to rate synthetic EM CDOs. This would bring additional volatility to the ratings on this transaction. Please refer to Moody's press release, "Moody's plans to revise its approach to rating emerging market CDOs," for further details regarding the implications of the proposed methodology changes on Moody's ratings.

V SCORE

The V Score for this transaction indicates Medium/High uncertainty about critical assumptions. This is in line with the Medium/High score for the Corporate Synthetic CDO Sector. The V Score for this transaction is driven by a high level of uncertainty of sector performance variability, medium/high level of analytical complexity in accessing risk to exposure in the emerging market countries and a quick turnover of the revolving reference portfolio, and a medium/high level uncertainty in assessing the portfolio credit quality (which is estimated based on credit mapping without knowing the exact credit quality of any individual name), as well as other factors.

Moody's V Score provides a relative assessment of the quality of available credit information and the potential variability of various inputs in a rating determination.

The V Score ranks transactions by the potential for significant rating changes owing to uncertainty about the assumptions due to data quality, historical performance, the level of disclosure, transaction complexity, modelling, and the transaction governance that underlie the ratings.

V Scores apply to the entire transaction, not to individual tranches.

PARAMETER SENSITIVITIES

Moody's also ran sensitivities for key parameters of the four rated tranches. For example:

If the assumed annualized weighted average default rate of 5.4% used in determining the initial rating was changed to 7.0%, the model output for the A, B and C Tranches will remain at least at the same level, and not below, their respective initial ratings. However, the model output for D Tranche would change to Ba1 from Baa3.

In addition to this change, if the assumed weighted average recovery rate of 25% were changed to 15%, the model output for B Tranches will remain at least at the same level. However, the model output for A, C and D Tranches would change to Aa1, Baa1 and Ba3 respectively.

Parameter sensitivities are not intended to measure how the rating of the security might migrate over time. Rather, they are designed to provide a quantitative calculation of how the initial rating might change if key input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged, and does not factor structural features such as sequential payment effect. Parameter sensitivities reflect only the ratings impact of each scenario from a quantitative/model-indicated standpoint.

Qualitative factors are also taken into consideration in the ratings process, so the actual ratings that would be assigned in each case could vary from the information presented in the parameter sensitivity analysis.

THE COMPANIES

The transaction is sponsored by SCB (A1/Prime-1/B-). Standard Chartered Bank (Hong Kong) Limited, the credit protection provider, is an established affiliate of SCB.

Standard Chartered Plc (A2) -- including 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.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

The rated entity has not informed Moody's whether the issuer is publicly disclosing all relevant information about the product.

Information sources used to prepare the rating are the following: parties involved in the ratings, and public information.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments in this transaction.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Elaine Ng Vice President - Senior Analyst Structured Finance Group 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) Jerome Cheng VP - Senior Credit Officer Structured Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED,DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.

All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error negligent or otherwise or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.

MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."

Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.

Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody's Japan K.K. ("MJKK") are MJKK's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, "MIS" in the foregoing statements shall be deemed to be replaced with "MJKK". MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO.

This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.

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