The Weak Economic Environment Dragged Down Ratings Performance in 2009, but 2010 Should See Stabilizing Credit Profiles

Ratings Roundup Report: The Weak Economic Environment Dragged Down Ratings Performance In 2009, But 2010 Should See Stabilizing Credit Profiles

2009/12/30 Susan Chu, (886) 2 8722-5813; [email protected] Daniel Hsiao, (886) 2 8722-5826; [email protected] Analyst: Andy Chang, CFA; (886) 2 8722-5815; [email protected] Aaron Lei , (886) 2 8722-5852 ; [email protected]

The continuing dislocation in the global and local financial markets and resultant low economic activity throughout most of 2009 had a strong negative effect on the credit performance of rated entities in Taiwan. This is reflected not only in general negative direction of ratings actions taken by Taiwan Ratings Corp. over the past 12 months, but also in the number. Nonetheless, we have observed signs of stabilizing credit profiles since the second half of 2009 (see chart 1). In Taiwan's corporate and financial sectors, the total number of issuer rating downgrades continued to exceed upgrades in 2009, due mostly to weak macroeconomic conditions, with 27 downgrades against only one upgrade. It should be noted, however, that 25 of these downgrades came in the first half of the year. Under still weak economic conditions, the financial sector led the negative rating migration, followed by some cyclical or highly leveraged industrial sectors. Similarly, the fragile global economy affected domestic structured finance ratings which also continued their negative trend from 2008, but most negative actions involved a small number of collateralized bond obligation (CBO) transactions with high exposures to foreign corporate and structured finance debts.

http://www.taiwanratings.com 1 Taiwan Ratings A Standard & Poor’s Ratings Partner Chart 1 Taiwan Ratings' Corporate & Government Ratings Upgrades And Downgrades*

Upgrade Downgrade 3

(1) Jul-08 Jul-09 Jan-08 Jan-09 Jun-08 Jun-09 Feb-08 Sep-08 Oct-08 Feb-09 Sep-09 Oct-09 Dec-08 Dec-09 Apr-08 Apr-09 Aug-08 Aug-09 Mar-08 Nov-08 Mar-09 Nov-09 May-08 May-09 (3)

(5)

(7)

(9)

*Corporate and government ratings include ratings on corporations and financial institutions.

Taiwan Ratings expects the performance of rated entities in 2010 will not face the significant pressures experienced in 2009, while there is also the likelihood of stabilization in the capital market and economic environment, locally and globally. However, negative ratings actions could still exceed positive actions over the next 12 months until the wider microenvironment improves substantially. Our negative bias (defined as the ratio of entities listed on CreditWatch Negative or with a negative outlook to total ratings) for the corporate and financial services ratings pool remained a high 19% in December 2009, though this figure is lower than the peak of 23% at the end of June 2009. At the same time, our positive bias gradually rose to 5% in December 2009. Taiwanese entities, especially financial institutions, are likely to continue to experience stress on their profitability, asset quality, and capitalization under current economic conditions (see chart 2).

http://www.taiwanratings.com 2 Taiwan Ratings A Standard & Poor’s Ratings Partner Chart 2 Taiwan Ratings' Corporate & Government Ratings Bias*

Positive bias Negative bias 0.20

0.15

0.10

0.05

0.00

(0.05) Jun09 Dec09 Jun-08 Dec-08 (0.10)

(0.15)

(0.20)

(0.25)

(0.30)

*Corporate and government ratings include ratings on corporations and financial institutions. Positive bias defined as the share ratio of entities listed in on CreditWatch Positive or with a positive outlook to total ratings. Negative bias is the opposite.

In the corporate sector, downgrades dominated rating actions in 2009, due to the effect of the continuing global recession on rated entities' performance (see tables 1 and 2). The ten downgrades we made included the steel, petrochemical, transportation, and high-tech sectors. Similarly, we made downward outlook revisions or made CreditWatch placements on three credits, one each in the steel, chemical, and transportation sectors. However, we raised the outlook or removed the CreditWatch status on three corporate credits to reflect our view that the issuers concerned were experiencing credit improvement, which may signal an impending credit recovery.

Table 1 Number Of Long-Term Corporate Credit Rating Changes In Taiwan During The Past Four Years 2009 2008 2007 2006 2005 Upgrade Downgrade Upgrade Downgrade Upgrade Downgrade Upgrade Downgrade Upgrade Downgrade Corporates 1 10 1 3 10 3 7 4 5 1 Financial 0 17 4 8 14 15 25 4 10 0 institutions Banks 0 7 2 4 3 14 12 4 5 0 Insurers 0 4 2 3 3 0 4 0 2 0 Securities 0 4 0 1 7 0 7 0 1 0 companies Financial holding 0 2 0 0 1 0 2 0 2 0 companies Total 1 27 5 11 24 18 32 8 15 1

http://www.taiwanratings.com 3 Taiwan Ratings A Standard & Poor’s Ratings Partner Table 2 Outlook Revisions Over The Past Four Years 2009 2008 2007 2006 2005 Upgrade Downgrade Upgrade Downgrade Upgrade Downgrade Upgrade Downgrade Upgrade Downgrade Corporates 3 3 4 5 3 4 0 1 0 1 Financial 12 19 1 17 7 3 7 5 9 0 institutions Banks* 5 9 1 8 4 3 3 4 5 0 Insurers 1 3 0 4 2 0 1 1 0 0 Securities 5 3 0 3 0 0 2 0 3 0 companies¶ Financial holding 1 4 0 2 1 0 1 0 1 0 companies Total 15 22 5 22 10 7 7 6 9 1 *Includes bills finance companies and finance companies.。¶ Includes securities finance companies.

The financial sector continued to experience negative rating action (including ratings and outlook changes) in the beginning of 2009 under the tough operating environment characterized by sluggish economic growth, low interest rate environment, and continued global financial market volatility. This followed the negative ratings movement since September 2008 when the global financial dislocation began. The downward pressure on ratings has gradually eased since the second half of 2009, when the global and local markets observed the seeds of a likely economic recovery. The potential for upward ratings actions, however, remained limited, and there were no ratings upgrades in 2009.

In the structured finance sector, 2009 featured diverse ratings performance among different asset sectors. CBO transactions with high exposure to foreign corporate and structured finance debts suffered from further deterioration in their underlying credits, while other transactions showed resilience despite the ongoing financial and economic disturbance. Throughout the year, Taiwan Ratings lowered its ratings on nine tranches, all of them from CBO transactions, and upgraded two tranches. Most negative rating actions occurred in the first half of 2009, but more recently we have observed some stabilization in transaction performances after the credit deterioration slowed down. Structured finance investors and originators in Taiwan have stayed on the sideline amid the global turmoil, and there were no new transactions in Taiwan's securitization market in 2009.

The credit quality of fixed-income funds remained stable despite the disruption to financial markets in 2009, partly thanks to the Taiwan government's policy measures to fully guarantee the nation's bank deposits, as well as the transformation of many funds into quasi-money market funds, which have very high liquidity.

CORPORATE SECTOR Negative rating actions continued to outnumber positive ones

Downgrades have outnumbered upgrades in the corporate sector for two consecutive years, and the ratio of downgrades to upgrades widened to 10 times (x) in 2009 from 1.25x in 2008. In the corporate sector, Taiwan Ratings lowered the ratings on ten credits and raised the ratings on only one, while the overall sector saw balanced

http://www.taiwanratings.com 4 Taiwan Ratings A Standard & Poor’s Ratings Partner outlook revisions, with three downward and three upward.

On May 6, 2009, we lowered our ratings on the Formosa Plastics group (FP group), including Formosa Plastics Corp., Nan Ya Plastics Corp., Formosa Chemicals & Fibre Corp., Formosa Petrochemical Corp., and Mai-Liao Power Corp., an independent power producer that is nearly 100% owned and operated by the FP group. The rating actions reflect the weakened financial risk profiles of the four core companies of the FP group due to the severe industry downturn and the likelihood that weak market conditions will continue to weigh down on the group's profitability and cash flow protection measures over the next two years.

On May 20, 2009, we lowered our issuer rating on Neo Solar Power Corp. (NSP), a small solar cell manufacturer. The rating action reflected the growing risk that the issuer's weakened profitability and cash flow protection measures amid the sharp industry downturn are likely to weaken NSP's credit metrics over the next one year, as we do not anticipate a rapid industry recovery.

On Nov. 13, 2009, we lowered our issue rating on Taiwan High Speed Rail Corp.'s (THSRC) US$300 million unsecured convertible bond. The downgrade reflects the rising risks that THSRC will not be able to fulfill the early redemption requirement on the rated bond in May 2010, as well as the high uncertainties surrounding the corporation's refinancing plan.

Table 3 Corporate Sector Downgrades Issuer To From Date Chi Mei Optoelectronics Corp. twBBB+/Negative/twA-2 twA-/Negative/twA-2 Feb. 19, 2009 Formosa Plastics Corp. twAA-/Stable/twA-1+ twAA/Stable/twA-1+ May 6, 2009 Formosa Petrochemical Corp. twAA-/Stable/twA-1+ twAA/Stable/twA-1+ May 6, 2009 Mai-Liao Power Corp. twAA-/Stable/twA-1+ twAA/Stable/twA-1+ May 6, 2009 Formosa Chemicals & Fiber twAA-/Stable/twA-1+ twAA/Stable/twA-1+ May 6, 2009 Corp. Nan Ya Plastics Corp. twAA-/Stable/twA-1+ twAA/Stable/twA-1+ May 6, 2009 Yang Ming Marine Transport twBBB+ /Negative/ twA-3 twA-/Negative/twA-2 May 21, 2009 Corp. Neo Solar Power Corp. twB+/Stable/twB twBB-/Stable/twB May 20, 2009 China Steel Corp. twAA+/Stable/twA-1+ twAAA/Negative/twA-1+ Sept. 14, 2009 Taiwan High Speed Rail Corp.'s twCCC+/Watch Neg twB/Watch Neg Nov. 23, 2009 Unsecured Convertible Bond

On June 25, 2009, we raised our ratings on Ho-Ping Power Co., to reflect our expectation that the power supplier is likely to further reduce its leverage through stable cash flow generation.

Table 4 Corporate Sector Upgrades Issuer To From Date Ho-Ping Power Co. twAA-/Stable/twA-1+ twA+/Positive/twA-1 June 25, 2009

Upward revisions to outlooks or CreditWatch status reflect signs of

http://www.taiwanratings.com 5 Taiwan Ratings A Standard & Poor’s Ratings Partner improvement We made upward revisions to the outlooks or CreditWatch status on two technology issuers (one panel maker and one electronics manufacturing service) and one construction company. We placed the rating on Chi Mei Optoelectronics Corp. on CreditWatch with positive implications due to the company's merger with Innolux Display Corp. We believe the post merger entity will have lower leverage, an enhanced business scale, and vertical integration with the Hon Hai Precision Industry Co. Ltd. group's electronics manufacturing services that will more than offset the risks of integration.

Table 5 Corporate Sector Outlook Revisions Issuer To From Date China Steel Corp. twAAA/Negative/twA-1+ twAAA/Stable/twA-1+ Feb. 26, 2009 Qisda Corp. twBB+/Stable/twB twBB+/Negative/twB June 15, 2009 Chi Mei Corp. twA/Negative/twA-1 twA /Stable/ twA-1 June 23, 2009 Taiwan High Speed Rail Corp.'s twB/Watch Neg twB/Stable Sept. 30, 2009 Unsecured Convertible Bond Cathay Real Estate Development twA-/Positive/twA-2 twA-/Stable/twA-2 Nov. 6, 2009 Co. Ltd. Chi Mei Optoelectronics Corp. twBBB+/Watch Pos/twA-2 twBBB+/Negative/twA-2 Nov. 16, 2009

Four new issuer credit ratings assigned Taiwan Ratings assigned four new issuer credit ratings in 2009, including Taiwan's largest corporate bond issuer, Taiwan Power Co. (Taipower). Our belief in an extremely high likelihood that the Taiwan government would provide extraordinary support if Taipower experiences financial distress underpins the ratings.

Table 6 Corporate Sector New Issuer Ratings Issuer Rating Date Taiwan Power Co. twAAA/Stable/twA-1+ June 30, 2009 J Touch Corp. twBB/Positive/twB July 6, 2009 Uni-President Enterprises Corp. twA+/Stable/twA-1 Sept. 9, 2009 Solar Applied Materials Technology Corp. twA-/Stable/twA-2 Sept. 22, 2009

Ratings withdrawn on three issuers Taiwan Ratings withdrew its ratings on three issuers at the companies' requests.

Table 7 Corporate Sector Ratings Withdrawn Issuer Rating prior to withdrawal Date Big Sun Energy Technology Inc. twB+/Negative/twB Jan 5, 2009 Yulon Motor Co. Ltd twA/Stable/twA-1 May 31, 2009 Neo Solar Power Corp. twB+/Stable/twB June 2, 2009

FINANCIAL SECTOR

http://www.taiwanratings.com 6 Taiwan Ratings A Standard & Poor’s Ratings Partner Negative rating movements continue amid sluggish global and local economies

Taiwan's financial institutions, including banks, insurers, securities companies, and financial holding companies, continued to experience negative rating action in terms of ratings and outlook changes in 2009 as their credit profiles weakened under continuing economic challenges.

Downward rating actions and outlook revisions mostly occurred in the first half of 2009, as the disruption in the global financial market continued. The downward trend of rating actions gradually eased since the second half of 2009, when capital markets observed the seeds of likely economic recovery. Upward ratings actions, however, remained limited, and there we made no ratings upgrade over the past 12 months. In April 2009, we downgraded two large financial groups with leading life insurers, given the difficulties for them to maintain their capitalization and profitability under the prevailing low interest rate environment and tough economic outlook. In June 2009, we downgraded a number of banks or applied a negative rating outlook due to the institutions' poor financial performance and the risk of higher potential credit costs if the economy did not improve.

Downgrades dominated rating actions in 2009 due to unfavorable credit conditions

Taiwan Ratings lowered its credit ratings on 17 financial institutions during 2009, the highest number of downgrades seen over the past five years. There were no upgrades in 2009. The ratings on Land Bank of Taiwan was lowered to reflect that there is a much reduced likelihood for it to merge with Bank Of Taiwan under the evolving regulatory and political environment in Taiwan.

The downgrade on Citigroup Global Markets Taiwan Securities Co. Ltd., Citibank Securities (Taiwan) Ltd. and Morgan Stanley Taiwan Ltd. reflects the deterioration in the standalone credit profile of the entities' US-based parent group and consequently on the weakened level of support we expect the group to provide to these subsidies.

The downgrade on Capital Securities Corp. reflects the company's weakened capitalization, which we believe will constrain its future business growth or geographic diversification.

The downgrade on Aegon Life Insurance (Taiwan) Ltd. reflects the heightened risks on the insurer's business profile and financial flexibility following the announcement by Netherlands-based Aegon N.V. (rated A-/Negative/A-2 by Standard & Poor's Ratings Services) that it has reached an agreement with the Taiwan-based holding company, Zonghwei (not rated), to sell Aegon Life (Taiwan).

The downgrades on Cathay Financial Holding Co. Ltd. (Cathay FHC) and Shin Kong Financial Holding Co. Ltd. (Shin Kong FHC) including the ratings on their core subsidiaries, reflect our view that these groups' profitability and capitalization are unlikely to recover to their previously good level over the next few quarters, given the weak economic outlook and a prevailing low interest rate environment. The downgrade on Sunny Bank reflects the difficulties that it faces to improve its weakening core earnings capability in the coming one to two years given its weakening market position and a likely increase in credit costs.

http://www.taiwanratings.com 7 Taiwan Ratings A Standard & Poor’s Ratings Partner

The downgrade on Bank of Kaohsiung reflects the erosion of the bank's core earning power, which is unlikely to restore to previous levels over the next two years given the bank's business profile with lower profit margins, slowing business momentum, and a likely increase in credit costs under the current economic downturn.

The downgrade of Bank of Panhsin reflects our expectation that the bank's weakening profitability is unlikely to improve in the coming one to two years given its small market position with a mediocre franchise. In addition, a potential increase in credit costs is likely to add further strain on the bank's profitability.

The downgrade of Cosmos Bank reflects the deterioration of the bank's earnings capability and the potential surge in credit cost over the coming two years, which could weaken the bank's capitalization

Table 8 Financial Institutions Downgrades Issuer To From Date Land Bank of Taiwan twAA/Stable/twA-1+ twAA+/Developing/twA-1+ Jan. 12, 2009 Citigroup Global Markets twA+/Negative/twA-1 twAA+/Stable/twA-1+ Feb. 9, 2009 Taiwan Securities Citibank Securities (Taiwan) twAA-/Negative/twA-1 twAAA/Stable/twA-1+ Feb. 9, 2009 Ltd. Morgan Stanley Taiwan Ltd. twAA/Negative/twA-1+ twAAA/Stable/twA-1+ Feb. 9, 2009 Capital Securities Corp. twA-/Stable/twA-2 twA/Watch Neg/twA-1 Feb. 25, 2009 Aegon Life Insurance (Taiwan) twA-/Watch Neg/-- twAA-/Stable/-- April 23, 2009 Ltd. Cathay Financial Holding Co. twAA/Stable/twA-1+ twAA+/Watch Neg/twA-1+ April 29, 2009 Ltd. Cathay Life Insurance Co. Ltd. twAA+/Stable/-- twAAA/Watch Neg/-- April 29, 2009 Cathay Century Insurance Co. twAA+/Stable/-- twAAA/Watch Neg/-- April 29, 2009 Ltd. Cathay United Bank Co. Ltd. twAA+/Stable/twA-1+ twAAA/Watch Neg/twA-1+ April 29, 2009 Shin Kong Financial Holding twA+/Stable/twA-1 twAA-/Watch Neg/twA-1+ April 29, 2009 Co. Ltd. Shin Kong Life Insurance Co. twAA-/Stable/-- twAA/Watch Neg/-- April 29, 2009 Ltd. Taiwan Shin Kong Commercial twAA-/Stable/twA-1+ twAA/Watch Neg/twA-1+ April 29, 2009 Bank Co. Ltd. Sunny Bank twBBB/Negative/twA-3 twBBB+/Stable/twA-2 June 11, 2009 Bank of Kaohsiung twA-/Stable/twA-2 twA/Negative/twA-1 June 15, 2009 Bank of Panhsin twBBB-/Negative/twA-3 twBBB/Stable/twA-3 June 15, 2009 Cosmos Bank twBBB-/Negative/twA-3 twBBB/Stable/twA-3 June 15, 2009

Global market disruption and economic slowdown resulted in downward outlook revisions

Outlook revisions at the beginning of 2009 were mostly negative and mainly due to our expectation that certain financial groups will face obstacles to stabilize their operating performance and restore their capitalization during the sluggish global and local economic outlook. We revised the outlooks on quite a few small or mid-sized

http://www.taiwanratings.com 8 Taiwan Ratings A Standard & Poor’s Ratings Partner banks to negative in June 2009, reflecting our concerns that the weakening profitability of these banks will come under further stress over the coming two years given their deteriorated core earning capabilities under weak economic conditions as well as a potential increase in credit costs.

Signs of the global capital market gradually stabilizing that indicated a likely stabilizing global economic outlook since the second half of 2009, led us to revise some of the negative outlooks on financial institutions back to stable if we expected the rated entities to be able to alleviate the earlier uncertainties we had over their weakening operating performance and capitalization. However, only the ratings on three financial institutions have positive outlooks including Capital Securities Corp. and EnTie Securities Finance Co. Ltd., which have demonstrated strengthening capitalization following the announcement of their merger. In addition, the positive outlook on Union Bills Finance Co. Ltd. reflects the likelihood that it will merge into the financially stronger entity, Union Bank of Taiwan.

Table 9 Financial Institutions Outlook Revisions Issuer To From Date Cathay Financial Holding Co. twAA+/Watch Neg/twA-1+ twAA+/Stable/twA-1+ Jan. 21, 2009 Ltd. Cathay Life Insurance Co. Ltd. twAAA/Watch Neg/-- twAAA/Stable/-- Jan. 21, 2009 Cathay Century Insurance Co. twAAA/Watch Neg/-- twAAA/Stable/-- Jan. 21, 2009 Ltd. Cathay United Bank Co. Ltd. twAAA/Watch Neg/twA-1+ twAAA/Stable/twA-1+ Jan. 21, 2009 Shin Kong Financial Holding twAA-/Watch Neg/twA-1+ twAA-/Stable/twA-1+ Jan. 21, 2009 Co. Ltd. Shin Kong Life Insurance Co. twAA/Watch Neg/-- twAA/Stable/-- Jan. 21, 2009 Ltd. Taiwan Shin Kong Commercial twAA/Watch Neg/twA-1+ twAA/Stable/twA-1+ Jan. 21, 2009 Bank Co. Ltd. Chartis Taiwan Insurance Co. twAA+/Negative/-- twAA+/Watch Neg/-- March 3, 2009 Ltd. Industrial Bank of Taiwan twA/Negative/twA-1 twA/Watch Neg/twA-1 March 3, 2009 China Development Financial twAA-/Negative/twA-1+ twAA-/Stable/twA-1+ Holding Corp. March 24, 2009 China Development Industrial twAA/Negative/twA-1+ twAA/Stable/twA-1+ Bank March 24, 2009

Grand Cathay Securities Corp. twAA/Negative/twA-1+ twAA/Stable/twA-1+ March 24, 2009 Standard Chartered Bank twAA+/Negative/twA-1+ twAA+/Stable/twA-1+ April 27, 2009 (Taiwan) Ltd. Citigroup Global Markets twA+/Watch Neg/twA-1 twA+/Negative/twA-1 May 5, 2009 Taiwan Securities Citibank Securities (Taiwan) twAA-/Watch Neg/twA-1 twAA-/Negative/twA-1 May 5, 2009 Ltd. Citigroup Global Markets twA+/Stable/twA-1 twA+/Watch Neg/twA-1 May 11, 2009 Taiwan Securities Citibank Securities (Taiwan) twAA-/Stable/twA-1 twAA-/Watch Neg/twA-1 May 11, 2009 Ltd. Polaris Securities Co. Ltd. twA/Negative/twA-1 twA/Stable/twA-1 June 5, 2009 Hwatai Bank twBBB+/Negative/twA-2 twBBB+/Stable/twA-2 June 5, 2009

http://www.taiwanratings.com 9 Taiwan Ratings A Standard & Poor’s Ratings Partner Union Bank of Taiwan twA-/Negative/twA-2 twA-/Stable/twA-2 June 5, 2009 Cota Commercial Bank twBBB+/Negative/twA-2 twBBB+/Stable/twA-2 June 5, 2009 SinoPac Holdings twA/Negative/twA-1 twA/Stable/twA-1 July 16, 2009 Bank SinoPac twA+/Negative/twA-1 twA+/Stable/twA-1 July 16, 2009 SinoPac Securities Corp. twA+/Negative/twA-1 twA+/Stable/twA-1 July 16, 2009 Chailease Finance Co. Ltd. twA/Negative/twA-2 twA/Stable/twA-2 July 28, 2009 EnTie Securities Finance Co. twBBB-/Positive/twA-3 twBBB-/Stable/twA-3 Sept. 16, 2009 Ltd. Capital Securities Corp. twA-/Positive/twA-2 twA-/Stable/twA-2 Sept. 16, 2009 Sunny Bank twBBB/Stable/twA-3 twBBB/Negative/twA-3 Sept. 21, 2009 Mega Securities Co. Ltd. twAA-/Stable/twA-1+ twAA-/Negative/twA-1+ Oct. 1, 2009 Mega Bills Finance Corp. twAA/Stable/twA-1+ twAA/Negative/twA-1+ Oct. 1, 2009 Chung Kuo Insurance Co. Ltd. twAA-/Stable/-- twAA-/Negative/-- Oct. 1, 2009 Mega International Commercial twAA+/Stable/twA-1+ twAA+/Negative/twA-1+ Oct. 1, 2009 Bank Co. Ltd. Mega Financial Holding Co. twAA/Stable/twA-1+ twAA/Negative/twA-1+ Oct. 1, 2009 Ltd. Hwatai Bank twBBB+/Stable/twA-2 twBBB+/Negative/twA-2 Dec. 16, 2009 Union Bills Finance Co. Ltd. twBBB/Positive/twA-3 twBBB/Stable/twA-3 Dec. 23, 2009

Three new issuer ratings assigned and eight withdrawals

Taiwan Ratings assigned three new ratings and withdrew five existing ratings on financial institutions in 2009. New ratings were assigned to Taishin International Bank Co. Ltd., Taishin Financial Holding Co. Ltd., and Chang Hwa Commercial Bank Ltd.

Table 10 Financial Institutions New Issuer Ratings Issuer Ratings assigned Date Taishin International Bank Co. Ltd. twA+/Stable/twA-1 Sept. 28, 2009 Taishin Financial Holding Co. Ltd. twA/Stable/twA-1 Sept. 28, 2009 Chang Hwa Commercial Bank Ltd. twAA-/Stable/twA-1+ Nov. 9, 2009

The rating withdrawal on Dah Chang Securities Co. Ltd., AEGON Life Insurance (Taiwan) Inc., Morgan Stanley Taiwan Ltd., Chinfon Commercial Bank Co. Ltd., First Financial Holding Co. Ltd., First Securities Inc., and King's Town Bank were at the request of the issuers. The rating withdrawal on Fubon Life Assurance Co. Ltd. was following the insurer's formal merger with ING Life Insurance Co. Ltd. on June 1, 2009.

Table 11 Financial Institutions Sector Ratings Withdrawn Issuer Rating prior to withdrawal Date Dah Chang Securities Co. Ltd. twBBB/Stable/twA-3 2009/1/7 AEGON Life Insurance (Taiwan) Inc. twA-/Watch Neg/-- 2009/4/28 Morgan Stanley Taiwan Ltd. twAA/Negative/twA-1+ 2009/4/29 Fubon Life Assurance Co. Ltd. twAA+/Stable/-- 2009/6/1 Chinfon Commercial Bank Co. Ltd. twB-/Developing/twB 2009/8/4 First Securities Inc. twA/Stable/twA-1 2009/8/24

http://www.taiwanratings.com 10 Taiwan Ratings A Standard & Poor’s Ratings Partner First Financial Holding Co. Ltd. twA+/Stable/twA-1 2009/8/24 King's Town Bank twBBB+/Stable/twA-2 2009/12/24

As of Dec. 25, 2009, the ratings on two financial institutions are on CreditWatch with negative implications--Chinatrust Commercial Bank and Chinatrust Financial Holding Co. Ltd.

Table 12 Financial Institutions Sector Ratings On CreditWatch Issuer Rating on CreditWatch Date Chinatrust Commercial Bank twAA/Watch Neg/twA-1+ Nov. 19, 2009 Chinatrust Financial Holding Co. Ltd. twAA-/Watch Neg/twA-1+ Nov. 19, 2009

STRUCTURED FINANCE SECTOR 2009 saw mixed rating performance across asset sectors and a continued standstill in new deal activity

Taiwan Ratings observed mixed rating performance for domestic structured finance transactions in 2009. The continued deterioration of global corporate credit and structured finance performance weighed some domestic CBO transactions, on which we lowered ratings or placed ratings on CreditWatch. Conversely, domestic collateralized loan obligations (CLO), real estate mortgage-backed securities (RMBS), real estate asset transactions (REAT), and asset-backed securities (ABS) transactions sailed through the impact of the global and local economic downturn, and maintained stable ratings in 2009.

Despite this difference, it appears that investors previously hurt in their structured finance positions are reluctant to review any new offerings, and effectively shut off the primary market throughout 2009, the first zero-transaction year since the market began in 2003.

Table 13 New Issue Ratings, Ratings Withdrawals, And Ratings Changes In 2009 Asset type New Withdrawn Upgrade Downgrade Watch Neg RMBS 0 2 0 0 0 ABS 0 0 0 0 0 CBO 0 2 0 29 38 CLO 0 5 2 0 0 Ground lease 0 0 0 0 0 Real estate asset 3 0 0 0 0 trust(REAT) Total 3 9 2 29 38 New Issue Ratings, Ratings Withdrawals, And Ratings Changes In 2008 Asset type New Withdrawn Upgrade Downgrade Watch Neg RMBS 0 1 0 0 0 ABS 0 0 0 0 0 CBO 2 0 0 14 24 CLO 0 9 15 0 0 Ground lease 0 0 0 0 0

http://www.taiwanratings.com 11 Taiwan Ratings A Standard & Poor’s Ratings Partner Real estate asset 0 0 0 0 1 trust(REAT) Total 2 10 15 14 25

Ratings assignment  On Sept. 23, 2009, we assigned ratings on the Class A, Class B, and Class C trust beneficial certificates issued by Shin Kong Life Insurance Tun Hwa Building Real Estate Asset Trust, which closed in June 2005.

Limited ratings upgrades

Ratings upgrades were limited in 2009 as Taiwan's economy dipped into recession and asset performance showed more negative movements. As of Dec. 25, 2009, we had upgraded our ratings on two trust beneficial tranches from one transaction. The upgrade happened in the CLO sector, where steady repayment of assets contributed to quick accumulation of credit enhancement.

On Nov. 11, 2009, we raised our ratings on the Class D and Class E beneficial certificates issued by Chinatrust Commercial Bank Collateralized Loan Obligation 2006-1 Special Purpose Trust (CTCB CLO 2006-1).

CBO transactions recorded multiple ratings downgrades

Taiwan Ratings made 29 downgrade actions on various tranches of two transactions from the onset of 2009 to Dec. 25, 2009. These transactions were CBO deals collateralized by off-shore synthetic collateralized debt obligations (CDO), and our rating actions related to the negative evolution of the underlying assets' credit quality. Most actions happened in the first half of 2009, and there have been signs of stabilization in recent months, as the speed of credit deterioration in global corporate credits slowed down. Whether this stabilization trend can be sustained will be critical to the transaction performance going forward.

 On December 24, 2009, we lowered our ratings on the Class C and Class D notes issued through Industrial Bank of Taiwan Collateralized Bond Obligation 2005-1 (IBT CBO 2005-1).  On August 26, 2009, we lowered our ratings on the Class A-2, B, and C notes issued by Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Securitization Special Purpose Trust 2006-1 (Polaris Sec. & BOOC CBO 2006-1).  On July 21, 2009, we lowered our ratings on the Class A-1, A-2, B, C, and D notes issued by Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Securitization Special Purpose Trust 2006-1 (Polaris Sec. & BOOC CBO 2006-1).  On June 4, 2009, we lowered our ratings on the Class A-1, A-2, B, C, and D notes issued by Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Securitization Special Purpose Trust 2006-1 (Polaris Sec. & BOOC CBO 2006-1).  On May 27, 2009, we lowered our ratings on the Class A and Class B notes issued through Industrial Bank of Taiwan Collateralized Bond Obligation 2005-1 (IBT CBO 2005-1).  On April 21, 2009, we lowered our ratings on the Class B, C, and D notes

http://www.taiwanratings.com 12 Taiwan Ratings A Standard & Poor’s Ratings Partner issued by Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Securitization Special Purpose Trust 2006-1 (Polaris Sec. & BOOC CBO 2006-1).  On March 20, 2009, we lowered our ratings on the Class A-2, B, C, and D notes issued by Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Securitization Special Purpose Trust 2006-1 (Polaris Sec. & BOOC CBO 2006-1).  On Feb. 19, 2009, we lowered our ratings on the Class C and Class D notes issued by Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Securitization Special Purpose Trust 2006-1 (Polaris Sec. & BOOC CBO 2006-1).  On Jan. 15, 2009, we lowered our ratings on the Class A-2, B, and C notes issued by Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Securitization Special Purpose Trust 2006-1 (Polaris Sec. & BOOC CBO 2006-1).

Table 14 Ratings Downgrades In 2009 Class of certificate Transaction Date Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Class A-2, B, and C Jan. 15, 2009 Securitization 2006-1 Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Class C and D Feb. 19, 2009 Securitization 2006-1 Class A-2, B, C, and Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond March 20, 2009 D Securitization 2006-1 Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Class B, C, and D April 21, 2009 Securitization 2006-1 Class A and B Industrial Bank of Taiwan Collateralized Bond Obligation 2005-1 May 27, 2009 Class A-1, A-2, B, C, Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond June 4, 2009 and D Securitization 2006-1 Class A-1, A-2, B, C, Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond July 21, 2009 and D Securitization 2006-1 Polaris Securities Co. Ltd. and Bank of Overseas Chinese Corporate Bond Class A-2, B and C Aug. 26, 2009 Securitization 2006-1 Class C and D Industrial Bank of Taiwan Collateralized Bond Obligation 2005-1 Dec. 24, 2009

Ratings on CreditWatch As of Dec. 25 2009, no structured finance ratings are on CreditWatch status.

FIXED-INCOME FUNDS SECTOR 11 new ratings assigned on increasing investor demand; no rating changes/withdrawals

Taiwan Ratings expanded its rating coverage on fixed-income fund ratings in 2009 following a wave of activity to consolidate funds. In our view, rated domestic fixed-income funds have demonstrated very stable credit quality after the funds transformed into quasi-money market funds, which tend to maintain very high liquidity and generally strong portfolio credit quality.

http://www.taiwanratings.com 13 Taiwan Ratings A Standard & Poor’s Ratings Partner Table 15 Fixed-Income Fund Sector New Ratings Fund Rating Date KGI Victory Fund twAAf Feb. 26, 2009 Prudential Financial Bond Fund Fund twAAf May 2, 2009 Fuh-Hwa Bond Fund twAAf June 16, 2009 DFE DWS Taiwan Bond Fund twAA+f June 22, 2009 SinoPac Bond Fund twAAf June 23, 2009 UPAMC JAMES BOND Fund twAAf June 24, 2009 IBT 1699 Bond Fund twAA-f June 24, 2009 Shin Kong Chi-Li Fund twAAf June 30, 2009 The Forever Fund twA+f July 1, 2009 Manulife Bond Fund twAA+f Sept. 17, 2009 Paradigm Pion Fund twAA-f Sept. 23, 2009

Still a tough credit environment in 2010

Currently the rating pool rated by Taiwan Ratings still indicates higher negative bias than positive bias, which implies there may be more negative than positive rating actions in the coming year. However, we do not expect rated entities to face the same degree of operating difficulty in 2010 as they did in 2009. Combined with the likelihood of a gradual stabilization in the capital market and economy, locally and globally, this indicates that ratings are likely to come under less pressure in 2010. ______Note: Ratings stated are correct as of Dec. 25, 2009.

http://www.taiwanratings.com 14 Taiwan Ratings A Standard & Poor’s Ratings Partner

http://www.taiwanratings.com 15 Taiwan Ratings A Standard & Poor’s Ratings Partner

Analytic services provided by Taiwan Ratings Corporation (TRC) are the result of separate activities designed to preserve the independence and objectivity of ratings opinions. The credit ratings and observations contained herein are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Accordingly, any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision. Ratings are based on information received by TRC. TRC has established policies and procedures to maintain the confidentiality of non-public information received during the ratings process.

http://www.taiwanratings.com 16 Taiwan Ratings A Standard & Poor’s Ratings Partner