Ratings

• The weighted-average seasoning of the trust portfolio is high at 94.5 months.
• The assets are good quality, with relatively low losses compared to HSBC's competitors and to the European index.
• HSBC has established strong underwriting and tight collection standards.
• Risks associated with dilution and fraud have been appropriately sized through the minimum seller share.

• The pool characteristics could change during the revolving period.
• Increasing competition in the U.K. credit card market has forced HSBC and its competitors to offer low introductory rates. This lowers the principal payment rate for the originator because customers do not have any incentive to make any payment beyond the minimum required monthly payment.
• On closing, only HSBC receivables will be sold into the trust but in future, receivables originated by HFC may be included in the trust. The gross charge-off for HSBC receivables is less than that for HFC. If the proportion of HFC receivables in the overall portfolio increases significantly, the overall charge-off for the transaction will increase.

• Assets may only be substituted if the replacements meet eligibility criteria.
• We derived a "steady state" figure for the principal payment rate, and applied considerable "haircuts" to this figure in its analysis.
• Our base case charge-off and payment rates were set after stressing them by increasing HFC's assumed proportion of receivables mix in the overall portfolio.

The European credit card market has grown rapidly since the mid-1990s. Credit card receivables are now widely seen as a stable asset class. Since the first credit card receivables securitization in 1995, there have been 61 issuances out of 12 trusts, a total of £31.4 billion. Approximately £22.8 billion of this issuance was still outstanding at the end of 2005. Barclaycard has issued the highest percentage of this total (27.2%), followed by MBNA (24.7%) (see chart 2).

HSBC and its subsidiaries form a U.K.-based group providing a comprehensive range of banking and related financial services.

The HSBC group, comprising HSBC Holdings and its subsidiaries, is one of the largest banking and financial services groups in the world, with over 9,800 offices in 77 countries and territories in five geographic regions: Europe, Hong Kong; the rest of the Asia-Pacific, including the Middle East and Africa; North America; and South America. Its total assets as at Dec. 31, 2005 were $1,502 billion. HSBC is HSBC group's principal operating subsidiary undertaking in Europe.

HSBC group acquired Household International Inc., one of the largest independent consumer finance businesses in the U.S., in March 2003. HFC is the U.K. arm of Household International. HFC transferred its credit card business to HSBC in December 2005.

HSBC is one of the leading credit card issuers in the U.K. It is regulated under the Financial Services and Markets Act of 2000 and is an authorized institution supervised by the FSA.

We rate HSBC's short-term unsecured and unguaranteed debt obligations at 'A-1+'.

HSBC issued its first credit card in 1972. HSBC's Card Services division manages the bank portfolio and leads the development of new credit card products for the originator.

Card Services is increasing its credit card portfolio through a multi-brand/multi-channel approach. It markets credit cards directly and through affiliates and under various brands and co-brands with third parties, as well as originating accounts under the HSBC brand.

As mentioned above, only accounts originated by HSBC and HFC will be eligible to be included in the securitized portfolio. The portfolio will not include M&S Money, John Lewis partnership and account cards, or First Direct receivables.

Card Services uses a customer-driven strategy and risk-based pricing to offer a range of products through a variety of origination channels to target different segments of the market with different brands. HSBC markets its cards primarily to existing HSBC customers, who tend to be more focused on customer service and issuer reputation. HFC targets clients who are not yet HSBC group customers. For example, co-branded retailer credit cards are marketed to store customers and customers averse to retail banks, while the "marbles" brand is marketed through the Internet.

Delinquent receivables are dealt with in different ways at various stages of delinquency. These efforts include statement messages, formal letters, and telephone calls generated through call processing centers at U.K. sites and at global service centers, which maintain an automated telephone dialing system to contact delinquent accountholders.

HSBC considers an account to be contractually delinquent if the minimum payment is not received by the due date indicated on the customer's statement. Once an account is recognized as delinquent, HSBC determines the timing and type of the initial contact and the frequency of subsequent contacts. This decision is based upon the score assigned to the account by the account management strategy system and the severity of any cardholder misuse.

After about 150 days' delinquency, HSBC receivables are typically referred to Debt Recovery Services, a wholly owned subsidiary debt recovery agency. Debt recovery services do not purchase the debt but take commission on any recoveries. HSBC will only re-age accounts where there was an administrative error or after two or more timely monthly payments on a delinquent account.

After default and delivery of a default notice, HSBC may choose to set off debts against the funds in an accountholder's HSBC bank account, unless these funds are protected from any set-off (e.g., student loans). Debts are rarely abandoned unless the debt is under £15.

Each set of final terms will contain tables relating to the securitized portfolio. These include the historic contractual delinquencies of accounts in the securitized portfolio, broken down according to the number of days by which payments are overdue, as well as loss experience and provisions for bad and doubtful debt.

HSBC continues to monitor fraud via a system known as FALCON, which monitors real-time credit card transactional activity and scores each transaction according to potential fraud risk. The bank continuously evaluates accountholders' credit behavior and suitability via TRIAD, an account management system. Both TRIAD and FALCON are industry-standard tools, which help in effectively monitoring credit behavior and fraud.

As part of servicing, HSBC sends monthly statements to its cardholders. HSBC's cardholders must make a monthly minimum payment of the greater of:

• 3% of the statement balance; and
• The stated minimum payment, which is currently £5 or the total amount if the balance is less than £5.

HSBC charges late and over-limit fees as well as charges for returned cheques. Finance charges on purchases are assessed monthly by multiplying the account's average daily purchase balance over the billing period by the applicable monthly rate.

A similar method is used to assess finance charges on cash advances. These are assessed monthly by multiplying the account's average daily balance of cash advances over the billing period by the applicable monthly rate.

HSBC may change the interest rates on its credit card accounts. Rates are not currently linked to any index. This is market practice in the U.K.

HSBC also offers activation programs and other incentive programs.

HSBC's pricing decisions are based upon:

• Actual and anticipated movements in underlying interest rates,
• Risk profile,
• Marketing strategies and recruitment campaigns, and
• The competitive environment.

Portfolio Statistics*
Expected closing date	June 8, 2006
Collateral	Credit card receivables
Eligible collateral	Visa and MasterCard receivables originated by HSBC and HFC
Initial collateral	Visa and MasterCard receivables originated by HSBC
Total receivables(£)	2,879,402,210
Weighted-average credit limit (£)	6,909
Weighted-average principal balance (£)	911
Weighted-average seasoning (months)	94.5
Country of origination	U.K.
Concentration	London (26.72%)
*As at March 31, 2006. All the data above corresponds to initial collateral only.

There is a separate priority of payments for finance charges and principal.

The finance charge priority of payments is used to cover the following amounts:

• Senior cost amounts,
• Class A monthly distribution amount,
• Class B monthly distribution amount,
• Servicing fee,
• Class A investor default amount and class A investor charge-offs,
• Class B investor default amount and class B investor charge-offs,
• Class C investor default amount, and
• Class C investor default amount and class C investor charge-offs.

The principal collections are used to pay principal in order of seniority, starting with the class A principal.

At closing, Turquoise will enter a currency swap with HSBC to hedge against currency mismatch between the collateral, which is denominated in sterling, and the payments, which are denominated in U.S. dollars. In the present structure, swaps will be executed at the issuer level, as there is only one global loan note. Each swap will correspond to a notional tranche of the global loan note, which in turn backs a series of notes issued by issuer.

If HSBC's rating falls below 'A-1+', it will be obliged to find a suitably rated replacement as swap counterparty within 30 days of the downgrade.

Swaps are entered into in accordance with Standard & Poor's criteria, which include minimum rating requirements and remedies following downgrade. Remedies include the posting of collateral, obtaining a guarantee, and replacement with another suitably rated party. We have set requirements regarding the amount of collateral that must be posted and will apply haircuts to the collateral to account for potential mark-to-market and foreign exchange risk. Swap agreements must also restrict the swap counterparty's ability to terminate the swap.

Protection for the class A notes is provided through the subordinate class B and C notes, and protection for the class B notes is provided through the subordinate class C notes.

Protection is provided to the class C notes through a spread capture mechanism that traps cash into an account if the average of three months' available spread measured across all series of linked notes is equal to or less than 4.5%. The account is held with HSBC, which has a short-term rating of 'A-1+'. Additional protection to class C notes is provided by a mechanism to trap excess spread.

The spread capture for the class C notes is shown in table 1 and is used to fund shortfalls of interest and, ultimately, principal on the class C notes. Our analysis of notes rated 'BBB' or below assumes that excess spread is available to be captured over a limited period.

Table 1 Spread Capture For The Class C Notes
Excess spread (%)	Spread amount (%)
>4.5	0.0
>4.0 and <=4.5	1.5
>3.0 and <=4	3.0
>2.0 and <=3.0	4.0
<=2.0%	4.5

Principal payment rate is defined as the ratio of monthly collection of principal to outstanding balance at the beginning of the month. It is expressed as a percentage. The payment rate is an important variable in the transaction as higher payment rates ensure that investors are paid quickly in adverse scenarios (see chart 3).

The monthly principal payment rate for the pool is healthy at around 21%. This has fallen from a high of 30% in August 2001. The recent drop in payment rate is a result of a marketing campaign that resulted in new customers being accepted on teaser rates. These customers do not have any incentive to repay more than the required minimum monthly payment. We expect that the principal payment rate will stabilize at about 20% per month.

Yield is defined as the ratio of aggregate monthly collections of interest, administration and penalty fees, and balance at the beginning of the month. The monthly yield thus calculated is annualized to derive the annualized yield. Although issuers treat interchange as a part of yield, we do not give any credit to it. Chart 4 shows the yield including interchange.

Gross yield for the pool has been steady at 16% each year until the first half of 2005. The rise in yield in the second half of 2005 was driven by risk-based pricing, which is now applied at both acquisition and account management level.

The monthly charge-off rate can be described by the ratio of monthly gross charge-off and outstanding balance at the beginning of the month. The monthly charge-off rate thus calculated is annualized to get the annual charge-off rate. We lag the total outstanding by six months, in line with the issuer's practice of defaulting accounts that have been delinquent for more than 180 days (see chart 5).

The charge-off for the pool was steady around 3% for almost three years until the first half of 2004. In June and July 2004, there was a spike in gross charge-off. The rise was due to:

• In June 2004, HSBC began charging-off accounts on notification of bankruptcy as required under the Enterprise Act 2002. This was coupled with an increase of more than 3.5x in outstanding balances on bankrupt accounts as compared to May 2004.
• In July 2004, there was an increase due to a one-off exceptional charge-off of outstanding deceased customers following a process review.

In the second quarter of 2005, there was a further rise in charge-off, caused largely by migration to the proprietary WHIRL process system. The charge-off is expected to remain steady at approximately 5% and is higher than the results seen for 2001-2004, before migration to the WHIRL system. This reflects the tougher economic and consumer environment experienced over the course of 2005 and into 2006. In particular, the increased incidence of bankruptcy filings is driving a higher level of charge-off.

Historically, TEP has had one of the lowest gross charge-off rates, compared to the prime issuers in the U.K. credit card market (see chart 6).

The gross yield for TEP has traditionally been lower than the index (see chart 7). We have seen a steady rise in gross yield for HSBC in the second half of 2005 as a result of risk-based pricing. A strong yield ensures that there is cash inflow in the transaction to pay to investors while sustaining the higher default conditions.

TEP's principal payment rate is higher than that of any other major issuer in the U.K. credit card market (see chart 8). The European credit card payment rate index averages around 16.5% for the past year, while HSBC's average payment rate for the same period is around 21.5%. This means that the principal will be paid back to investors more quickly, reducing exposure to higher default conditions.

Under the given credit structure, if the gross charge-off moves up by 1.0% from the base case of 5.5%, the yield needs to move up by 3.5% to compensate. There is flexibility built in the stress ranges applied, which allows the structure to absorb some upward movement in charge-off without a corresponding rise in yield.

If the principal payment rate drops by 1.00% from the base case of 20.00%, the yield needs to move up by 2.95% to compensate. As discussed in scenario 1, there is flexibility built in the stress ranges applied, which allows the structure to absorb some of the possible downward movement in principal payment rate without a corresponding rise in yield.

We will continuously monitor the collateral performance for any adverse effect on the ratings on the notes.