HK Turbo Mtge Fndng Ltd Notes Expect AAA/AA From Fitch IBCA.

NEW YORK--(BUSINESS WIRE)--June 8, 1999--

Upon receipt of satisfactory final documentation, Fitch IBCA expects to rate the series A notes of Hong Kong Turbo Mortgage Funding Ltd.'s (Hong Kong Turbo's) US$302,000,000 or equivalent transaction `AAA' and series B notes `AA'. Notes within each series are comprised of floating and fixed tranches in US$, EURO, or HK$ denominations.

Each of the notes pays interest and principal (if applicable) quarterly in March, June, September, and December and has a final legal maturity of June 2005. Within each series, the notes are pari passu regardless of currency denomination and fixed or floating interest rate.

Fitch IBCA's expected ratings addresses timely payment of interest and the ultimate payment of principal. Fitch IBCA's expected ratings do not address the timing or likelihood of prepayments and/or receipt of prepayment premiums or default interest.

Hong Kong Turbo is a special purpose company incorporated in the Cayman Islands with limited liability. The notes are secured by separate mortgage loans extended to 21 bankruptcy-remote special purpose vehicles (Mortgagor SPVs) established in the Hong Kong Special Administrative Region (Hong Kong) or the Cayman Islands. Each loan is also secured by but not limited to: an assignment of the mortgagor's right, title, interest in, to, and under the relevant tenancy agreements, insurance policies, all relevant bank accounts, and shares of each of the Mortgagor SPVs. At the closing of this transaction, Hong Kong Turbo will make a HK$2.34 billion mortgage loan to the Mortgagor SPVs.

Fitch IBCA's expected ratings reflect the strengths and concerns of the transaction. Among the positives include: the first 'fast pay' structure for an Asian commercial mortgage-backed security (CMBS) whereby all excess cash flow (net of operating expenses) will be used for repayment of interest and principal allowing Fitch IBCA to re- allocate the ratings distribution upwards; substantial debt service coverage ratios (DSCRs) using Fitch IBCA's adjusted net cash flows and mortgage refinance constant for Hong Kong commercial properties of 2.95 times (x) for the `AAA' tranche, 2.24x for the `AA' tranche, and 1.82x for the `A' tranche (this tranche has been subsequently redistributed upwards to the `AA' tranche); the low leverage as indicated by the Jones Lang LaSalle (JLL) valuation equal to 35.09% loan-to-value; a six-month interest reserve fund with an initial balance of HK$115 million; a conservative release pricing mechanism where release prices range from 1.75x - 2.00x upon sale of specific properties except for Tuen Mun Town Plaza; relatively greater property-type and geographic diversification; and the one-year 'tail' to work out the mortgage loan in the event of balloon payment default, coupled with the relative ease of enforcement of lender remedies in Hong Kong if loan or property performance erodes. The expected ratings also reflect the integrity of the legal and financial structures. Concerns include the lower quality of most of the properties in this portfolio and the susceptibility of higher variability in lease rates and occupancy rates especially since the trough of the current commercial property cycle has not yet been reached (although this has been mitigated by Fitch IBCA-stabilized cash flow analysis and DSCRs); lack of a strong primary servicer, especially given the recent administrative difficulties Fitch IBCA has noted in another Sino Land Co. Ltd.-serviced transaction (although recent personnel changes have improved Fitch IBCA's confidence in the servicing operations). Additionally, the current structure limits flexibility on the part of related party servicers and lacks third-party servicing in the traditional sense although limited oversight is provided by the third-party transaction administrator/security trustee. Lastly, the transaction lacks servicer advancing (although liquidity is provided through a cash reserve and the 'fast pay' cash flow structure).

Fitch IBCA was able to rate the series A notes above Hong Kong's long-term `A+' foreign currency and `AA+' local currency sovereign ratings because the structure was stressed to withstand up to a `AAA' level in terms of local currency and the swap provider (rated `AA/F1+') took on convertibility, transfer, and substitution risk. Similarly, the series B notes were stressed to withstand up to a `AA' scenario in addition to the supporting cross-currency swaps absorbing convertibility and transfer risk. Deutsche Bank, A.G., Frankfurt Branch is the swap provider for this transaction. Furthermore, Fitch IBCA's rating approach in overcoming the foreign currency sovereign ceiling involves the joint probability of two relatively independent and unlikely events occurring simultaneously: an `A+' stress environment resulting in Hong Kong impeding foreign currency debt payments and a default of the `AA/F1+' rated cross-currency swap provider. Given the relative independence of these two events, Fitch IBCA considers the likelihood of this happening as `AAA' remote. The 'dual default' likelihood is so low that even a one-notch downgrade of either Hong Kong's or the swap provider's ratings will not automatically result in a downgrade of the senior tranche of this transaction.

The principal assets of the trust are 21 separate mortgage loans secured by a first fixed charge of a portfolio of properties distributed throughout Hong Kong. The portfolio incorporates 95,502 leaseable gross floor area (GFA) of residential properties, 1.59 million GFA of commercial (office and retail) space, 767,591 GFA of industrial area, and 3,388 car parks. The properties are held by the Mortgagor SPVs under government leases granted by the Hong Kong government. Each of the government leases mature beyond 30 years of the closing date and all except for two extend up to 2047. The properties offer limited geographic and property type diversification with a high concentration represented by Tuen Mun Town Plaza, a Grade B retail complex in the city of Tuen Mun in the New Territories. The occupancy and lease rate of the complex have been historically high relative to the grading of the shopping mall and as such, Fitch IBCA applied lower 'haircuts' to arrive at its stabilized income contribution and also applied lower DSCR relative to the rest of the pool. The continual attraction of tenants and customers to Tuen Mun Town Plaza has been proven when during the height of the 1997-1998 currency crisis, two major tenants (Carrefour, rated 'F1+' by Fitch IBCA, and Jusco) signed long-term leases at significantly higher lease rates than the prior tenant, Yaohan Department Store, which declared bankruptcy in December of 1997. Other than the residential properties, the grading of the remaining industrial and commercial properties range from `C' to `B-` with a `B-` weighted average grading from the entire portfolio. Fitch IBCA compensated for the lower quality of the portfolio in the net effective rent analysis and substantial DSCRs. The composition of the portfolio may change during the tenor of the notes as the Mortgagor SPVs have the ability to sell properties prior to a mortgage loan event of default. The risks associated with this option has been mitigated by two measures: (i) a release lock-out of Tuen Mun Town Plaza, and (ii) proceeds from the sale of properties equivalent to 1.75x - 2.00x of the initial allocated mortgage loan amount must be deposited into the reserve fund for repayment of interest and principal.

Fitch IBCA relies primarily on a cash flow analysis when sizing the appropriate debt amount at a given rating level. To address the cash flow volatility of the properties, Fitch IBCA marked rental income to market, as evidenced by the most recent leases signed within the subject buildings. On a lease-by-lease basis, leasing commissions (1 month) and free rent (2 months) were deducted from the face rent paid over the lease term. Fitch IBCA applied additional 'haircuts' ranging from 0% to 10% additional vacancy and 5% to 15% additional rental rate decline for residential, commercial, and industrial properties, and 5% additional vacancy decline on car parks. Fitch IBCA also reviewed historical operating expenses and made adjustments for items such as professional fees, car park management expenses, stamp duties, government lease payments, insurance premiums, and the average JLL annual capital expenditures to derive the Fitch IBCA underwritable cash flow. Fitch IBCA's estimate of sustainable annual cash flow available for debt service totaled HK$490 million.

To size the amount of each of the tranches, Fitch IBCA used a hypothetical mortgage refinance constant of 11.43% based on an 11.0% interest rate and a 30-year monthly amortization schedule. The actual interest rate on the mortgage loan will be finalized at closing but is significantly lower than Fitch IBCA's stress rate. Fitch IBCA believes that its mortgage refinance constant is appropriately higher than the actual interest rate to mitigate the risk that refinancing costs will be higher at the balloon maturity date. Using the Fitch IBCA-stabilized cash flow, refinance constant, and applicable investment- grade DSCRs, the agency sized the following proceeds by ratings category: US$187 million or equivalent for the `AAA' tranche, US$59 million or equivalent for the `AA' tranche, and US$56 million or equivalent for the `A' tranche. Although Fitch IBCA's analysis is primarily cash flow driven, Fitch IBCA views LTVs as important indicators of whether liquidation of the assets would provide adequate proceeds to enable investors to recover all principal and accrued interest through enforcement and sale of properties. Based on the loan amount of HK$2.34 billion and an assessed value of HK$6.68 billion (dated 1 May 1999) by JLL, the actual LTV for the entire mortgage loan is 35.09% under a `A' stress, 28.76% under a `AA' stress, and 21.79% under a `AAA' stress.

Unique to this transaction relative to other performing CMBS transactions rated by Fitch IBCA is the `fast pay' cash flow structure whereby all excess cash flow, net of operating and interest expense, is trapped for the benefit of principal repayment. This `fast pay' structure decreases the refinancing risk of the balloon principal payment normally associated with interest-only structures as well as lowers the ongoing nominal interest cost, which is calculated off the outstanding principal balance. Therefore, the creditors benefit from any above-market rents currently existing in the portfolio and any recovery in the property market cycle for the life of the transaction. For interest-only transactions, refinancing risk has typically been mitigated by a high refinancing rate constant and a one-year disposition 'tail' subsequent to the maturity of the mortgage loan. In the Hong Kong Turbo transaction, the `fast pay' structure offers additional benefit that Fitch IBCA quantified through many iterations of cash flow modeling. Certain key assumptions were made, including but not limited to: (i) the applicable stress scenario occurs immediately and impacts the actual cash flow over a two-year period on a straight-line basis where after eight quarterly periods, the expected cash flow is equivalent to the Fitch IBCA-stressed stabilized cash flow (Fitch IBCA-stabilized cash flow stressed with the respective DSCR); (ii) the interest rate used is the actual interest rate and not the refinance rate constant; and (iii) partial credit for highly rated, long-term leases. Under each stressed cash flow scenario, certain prepayments were projected that allowed Fitch IBCA to adjust proceeds by rating category upwards. This methodology does not increase the proceeds originally sized but just re- allocates the rating categories. Therefore, in addition to a specific amount of principal stressed by the applicable ratings scenario and under a typical interest-only structure, Fitch IBCA was certain that an additional amount represented by the prepayments would occur under each of the rating scenarios. The proceeds that were originally allocated to the `A' tranche were upgraded to `AA' and a portion of the `AA' tranche was upgraded to `AAA'. The analysis resulted in a US$241 million `AAA' tranche and a US$61 million `AA' tranche.

Three types of insurance coverage are provided for in this transaction including property damage, loss of profits, and public liability. The minimum rating of the insurance provider is `A-`. The minimum amount of property damage insurance will be the lesser of the cost of reinstatement or the outstanding principal balance of the notes, commencing on the closing date at HK$2.2 billion. Insurance for loss of profit will be equivalent to two years of gross rental income and the minimum coverage for public liability is HK$30 million. Should property damage exceed 30% of the original principal balance of the notes, insurance proceeds will be used for principal repayment. If proceeds from the property damage insurance exceed 3% of the JLL valuation and either (i) the expected completion date for reinstatement is after the six months prior to the mortgage loan maturity date and/or (ii) the expected completion date is longer than the existing loss of profits coverage concurrently exists, the insurance proceeds will be used for principal repayment. Otherwise, all proceeds will be used for reinstatement.

Liquidity is provided for in the form of a reserve account funded at the close of the transaction amounting to approximately HK$115 million. The minimum balance of the reserve account is equal to the greater of (i) six months of security deposits or (ii) two quarters of interest payments assuming no principal repayment for the second quarter. Additionally, excess cash flow can be used as liquidity and will be used to replenish the reserve account to the minimum required balance. Fitch IBCA believes that there is sufficient liquidity in the transaction corresponding to the ratings of the notes.

As part of its due diligence process, Fitch IBCA met with Sino Land Co. Ltd. senior management, conducted Lexis/Nexis searches, and checked lender references. No major unresolved adverse information was reported. Sino Land Co. Ltd. is one of the larger property management and property development companies listed on the Hong Kong stock exchange. As noted above, Fitch IBCA has experienced administrative and reporting problems in another CMBS transaction sponsored by the same organization. However, with the recent appointment of Benjamin Y.Y. Lam, in April 1999 as the new Group Chief Financial Officer, Fitch IBCA feels that many of the difficulties previously experienced will be corrected.