Wednesday, 18 July 2018

Japan 2007: Sticking to its guns

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Global securitisation has transformed from hero to zero with issuance levels going from exuberant to non-existent. Japan has also endured a market retreat with securitisation in the year to September at US$21bn, compared to a record $41bn last year. But despite the downturn Japan's isolationist spirit and cautious approach has seen it avoid the worst of the excesses seen elsewhere, writes Govinda Finn.

The explosive growth of Japan's securitisation markets over the past few years waned in 2007 as the perennial drivers, RMBS and CMBS, stalled. That was matched by a failure of new product sectors such as whole business

securitisations (WBS) to materialise. However, despite the gloom, Japanese markets fared relatively well in comparison to global markets with pricing remaining remarkably stable despite a global credit crisis and a ratings shock of its own.

The resoluteness of Japan's securitisation market comes from the exceptional quality of assets underlying Japan's securitised products and the domination on both the investor and originator side by domestic players.

Investors in Japan are almost exclusively domestic institutions as tax regulations and high prices combine to keep overseas investor interest limited to CMBS and some RMBS. More importantly these institutions are real money investors and the funds are not affected directly by conditions in the credit markets.

As such Japan has been able to rely on a relatively robust demand for securitised products throughout the year and the markets remained open even at the height of the sub-prime crisis.

Japan's structured finance markets are also the exclusive domain of Japanese issuers and have been dominated by a trio of repeat issuers: the Japan Housing Finance Agency (JHFA), Bank of Tokyo Mitsubishi UFJ and Sumitomo Mitsui Banking Corp.

These three issuers have provided the majority of the country's RMBS transactions and the JHFA's share has grown even further in 2007 with ¥1.1trn of the ¥1.6trn issuance year to date coming from JHFA, a 69% market share. That compares to ¥2.23trn of ¥4.9trn issued in 2006, or a 44.12% market share.

These perennial issuers differ from US and European financial institutions in that they are over-moneyed – deposits are greater than loan assets – rather than being over-leveraged. As a result they view the securitisation market as a way to balance asset and loans and manage interest rate risks rather than a tool to raise funds.

As a result they are less sensitive to market fluctuations and pricing and provide a relatively stable source of deals. Bankers admit that the deal flow has declined over the past 12 months but insist that is because the balance sheet management approach of Japan's financial institutions provides only a finite supply of loans to securitise.

But it is not just market participants that have protected Japan from global securitisation woes. Japan has almost completely side stepped the sub-prime panic. Moody's noted that none of its rated Japanese finance transactions are backed by or referenced to US sub-prime mortgage loans, structured finance transactions backed by US sub-prime mortgages, or US residential mortgage lenders.

The isolation of Japan securitised products is enhanced by the credit quality of Japanese mortgage transactions. The underlying mortgages for both RMBS and CMBS in Japan have extremely low default rates with only seven defaults since the inaugural Japan securitisation issue 13 years ago.

But Japan's securitisation markets were not without their own problems over the past 12 months and S&P's decision to downgrade a collateralised bond obligation, CBO ALL Japan, from AA to BB+ sent shock waves through the market.

The decision was based on a miscalculation of the default rate on the underlying corporate loans with one banker noting that S&P had calculated the expected loss rate for the security at 1.5%–2%, despite a historical performance of 5.0%–6.5%.

The impact of the downgrade was heightened by the rarity of the event with 225 upgrades and only nine downgrades -- eight of them for CBO All Japan -- having been seen this year.

Another area of concern for the market in 2007 has been the dismal performance of consumer finance firms. The worst fears for the sector were confirmed when Credia, a mid-tier consumer finance specialist, filed for bankruptcy on September 14. Credia is a servicer of three ABS transactions and became only the seventh issuer of structured products to file for bankruptcy in Japan.

However, perhaps the biggest area of disappointment for the Japanese securitisation market is the failure of a whole business securitisation market to emerge. In December 2006 SoftBank completed a ¥1.45trn deal to securitise its mobile phone unit in what many regarded as a breakthrough deal. But there have been no WBS deals in 2007.

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