Tokyo, March 15, 2011 -- Moody's Japan K.K. says, in an early assessment,
that that the ratings impact of last week's earthquake on the Japanese
structured finance market will be limited for the ABS, SME CDO,
and CMBS sectors, but some negative implications, will emerge
for those RMBS with regional concentrations.
The magnitude 9 earthquake and resultant tsunami that hit the country
on March 11 has wrought most of its devastation in Miyagi, Iwate,
and Fukushima, all prefectures on the east coast of the main island
of Honshu.
So far, the tragedy has resulted in thousands of dead and missing,
while rescue efforts and humanitarian relief programs continue.
In a separate special comment on the sovereign rating, Moody's
says that the shock from the earthquake does not make a fiscal crisis
in Japan imminent. The country's deep and liquid government
debt market will likely continue to fund government deficits, and
even a larger deficit as a result of the earthquake, at an exceptionally
low cost.
And in another special comment, Moody's says that it also
sees limited rating implications for most large corporates and financial
institutions in Japan. Most of Moody's rated entities are broadly
diversified, nationally and -- for some --
internationally.
Moody's also says in a special report that four catastrophe bonds
it rates are exposed to earthquakes in Japan, and that the credit
impact will be negative on all of these bonds.
Below are Moody's preliminary assessments of the impact of the quake
on each of the key sectors in Japan's structured finance market.
More detailed analyses will emerge once more information becomes available.
Again, this is Moody's immediate and direct assessment of
last Friday's earthquake and the ensuing tragedy on its structured
finance ratings, the underlying assets of which are located in Japan.
Moody's will keep a close watch on any further direct and indirect effects
on the macro-economy and performance, the overall liquidity
of the financial market, and the sustainability of electricity capacity.
Lease ABS -- Limited Negative Impact
Obligors are mainly corporates, and there is no evidence of high
levels of concentration towards any one individual company or group.
The leased properties in the existing transactions are diversified geographically,
and, on a deal-by-deal basis, only between 1.5%
and 4.3% are located in Miyagi, Iwate and Fukushima
prefectures.
In most transactions, credit enhancement ratios had previously increased
because of sequential redemption. Accordingly, tolerance
to performance deterioration has strengthened.
Auto/ Installment Sales/ Credit Card/ Consumer finance ABS -- Limited
Negative Impact
Obligors are manly individuals, and no transactions show high concentrations
of borrowers to Miyagi, Iwate and Fukushima prefectures.
Accordingly, any negative impact to pool performance would be limited.
And even if performance deteriorates, robust deal structures,
which include features such as dynamic reserves and sequential amortization,
would contribute significantly to ratings stability.
Real Estate-backed SME Loan ABS -- Limited Negative Impact
The exposure of the underlying properties to Miyagi, Iwate and Fukushima
prefectures is small, typically between 0.6% and 3.2%.
Therefore, geographic diversification is apparent.
SME CDO -- Limited Negative Impact
Total loan exposures among the 11 Moody's-rated SME CDOs
to Miyagi, Iwate, and Fukushima prefectures is low,
only about 2.4%.
Additional government support is also available. The Ministry of
Economy, Trade and Industry announced on March 12, the day
after the quake, that the Credit Guarantee Corporation would provide
100% guarantees of up to JPY 280 million (including JPY 80 million
in unsecured loans) to affected SMEs. This measure excludes the
outstanding guarantee limitation already provided.
The government has further announced extensions on the maturities for
loans taken by small companies to purchase equipment and lower interest
rates.
However, adverse developments in the business environment could
ultimately affect SME CDO performance.
For the SME CLO series by the Japan Finance Corp, the ratings impact
is limited, given a loan exposure of only 3.4% to
the disaster areas. Although half the loans belong to "Tanpopo
2008", the transaction will reach final maturity at end-March
and subordination is very high due to amortization. Accordingly,
even if its exposures to the disaster areas default, its ratings
are unlikely to be affected.
For the regional government CLO series, their obligors are in the
cities of Tokyo, Osaka, Yokohama, and Kobe, or
outside the disaster areas. In addition, increased credit
enhancement because of sequential payments provides support. Accordingly,
Moody's sees no ratings impact.
Specifically, these deals are Tokyo Metropolitan CLO Ninth,
Ordinance-Designated Cities CLO Fourth, and Santoshi CLO2009.
CMBS -- Limited Negative Impact
The impact on the CMBS sector is likely to be limited. Eleven of
the 79 CMBS in the Moody's portfolio have a total of 30 properties in
the affected areas, and are valued at JPY 29.4 billion,
based on Moody's initial evaluation, or just 0.7%
of the total rated amount.
Among the 11 deals, concentration to the affected areas is between
0.4% and 12.7%. In terms of damage,
according to asset manger reports, three hotels have stopped operations.
Infrastructure problems and other difficulties associated with the quake
will also have short-term negative implications for hotels and
retail properties outside the affected areas. In this context,
Moody's can confirm that two hotels and one retail property outside
the quake-impacted areas have suspended operations.
RMBS -- Limited Negative Impact, But Possible Negative Impact
on Deals with Regional Concentrations
Many loan pools originated by major Japanese banks with national networks
have exposures to the affected areas, but with almost all deals,
exposures are less than 2% to Miyagi, Iwate, and Fukushima
prefectures. In addition, increased credit enhancement because
of sequential payments will mitigate possible negative effects.
In the case of loan pools originated by the regional banks, there
will be negative implications. Some originators operate mainly
in the affected areas and consequently some of their deals may experience
significant performance deterioration.
In some other cases, their loans are concentrated on the periphery
-- for example, Ibaraki prefecture -- of the hardest-hit
areas, and will also accordingly be affected.
In these situation, the default rates for loan pools could increase
because [1] obligors may lose their jobs; [2] obligors
who lose their houses because of quake damage may have to both pay rent
for new accommodation and keep up payments on their original mortgages;
and [3] obligors may be unable to work for long periods because of
injuries.
In addition, recovery rates will decrease because it would be difficult
to sell damaged or destroyed.
On the other hand, Moody's sees various mitigants: [1]
the quake did not severely damage the inland areas; [2] asset
guarantees can fully cover defaulted loans; [3] death payouts
from group life insurance can pay outstanding loans in the event of an
obligor's death; and [4] credit enhancement levels have
increased.
In the case of RMBS backed by investment-purpose condominium loans,
the impact is limited because of limited exposures to the areas affected.
But Moody's believes that RMBS backed by apartment loans are at
risk. Specifically, in the case of non-recourse apartment
loan-backed securities, exposure to Miyagi, Iwate,
and Fukushima prefectures ranges between 2% and 25%,
and in most cases between 5% and 7%.
With recourse apartment loan-backed securities, in some deals,
exposures to the three affected prefectures are high.
The quake will affect apartment loans more than residential loans because
of the absence of both asset guarantees and life insurance for loan repayments,
and due to their non-recourse nature. In addition,
in the case of apartment loans, earthquake insurance is not usually
mandatory. Many apartments, although not all, may be
on the coastal areas.
Tokyo
Mitsuteru Masuoka
VP - Senior Credit Officer
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Tokyo
Koji Kumamaru
MD - Structured Finance
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's: Limited impact on Japan structured finance from quake
