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Announcement:

Moody's: No rating actions on apartment loan RMBS due to Japan's quake for now

 The document has been translated in other languages

28 Mar 2011

Tokyo, March 28, 2011 -- Moody's Japan K.K. says that, at this stage, it does not need to take rating actions on apartment loan-backed securities ("apartment loan RMBS"), on which the impact of the Japan earthquake on March 11 has been closely monitored. That is because (1) the deals' exposures to the prefectures affected by the quake are high, but exposures to the areas severely affected by the tsunami are low, and (2) thus, in Moody's view, apartment loan RMBS deals will have enough credit enhancements to maintain the current ratings, even if such enhancements declines due to defaults by loans secured by apartment buildings in the flooded areas. This comment reflects the results of Moody's detailed analysis following its March 15 comment, "Moody's: Limited impact on Japan structured finance from quake" on the impact of the earthquake.

Since the quake hit eastern Japan, Moody's continued to conduct review of the impact on apartment loan RMBS with high exposures to the severely affected prefectures - Iwate, Miyagi, and Fukushima.

The worst damages were caused by the tsunami. Damages to the collateral apartment buildings for other reasons, for example, damages directly caused by the quake itself should be limited, based on Moody's review of the locations of the buildings, their earthquake-resistance, and reports on damages from a variety of sources.

If the buildings collapsed and became unusable for residence, buildings owners, i.e. the underlying obligor for the apartment loans, could not receive rents of apartments any more. In the rated transactions, the owners master-lease the apartments - which in effect results in the master lessee "guaranteeing" rents - to some development or management companies, such as Daito Trust Construction (Daito), and Leopalace 21 (Leopalace). Should the buildings collapsed and became unusable for residence, the master lease agreements would terminate, and the owners could not receive rents of master leases thereafter. However, if the buildings were damaged but not destroyed, the owners will continue to receive rents from the apartments/ master-leases, although they would incur costs for the repair of damages. The master-lease rents will be used first to make the payments on the apartment loans. Therefore, it matters whether the collateral apartment buildings collapsed and are usable for residence/ leasing. In our analysis, however, Moody's does not give credit to the rents "guarantees" provided by master leases.

To estimate the damages on the collateral apartment buildings due to the tsunami, Moody's looked at the addresses of each of the properties to see if any were located in areas affected by flooding. Moody's also examined maps of the flooded areas published by Japan's Geospatial Information Authority (under Ministry of Land, Infrastructure, Transport and Tourism), as well as maps of the flooded areas published by a private company. Furthermore, Moody's examined the news reports on the damages of tsunami. Addresses or detailed information were unavailable for only a few properties, in which case Moody's simply assumed that these buildings were in the flooded areas.

Based on the above, Moody's concluded that only about half of the Japan's apartment loan RMBS deals have exposure to flood affected areas. However, for any of the deals, exposure to the flooded areas is less than 2%. Even if more conservative measurements are employed by incorporating surrounding areas, for any of the deals, exposure is less than 3%. Overall, the Daito deals are less exposed to the flooded areas than the Leopalace deals. In particular, Daito's DTC series (DTC One to Nine) have low or no exposure.

As the exposures to the flooded areas were not that high, a decline, if any, in credit enhancements (i.e., subordination ratios plus excess spreads) due to the losses caused by the tsunami would not lead to any ratings downgrades. The credit enhancements would not decrease so much, even if it were conservatively assumed that all loans exposed to the flooded areas defaulted, and that a part of the loans exposed to the surrounding areas defaulted.

Moody's also reviewed the possible negative impact of the disaster at the Fukushima nuclear power plant on the rated transactions, but only a few have any exposures to areas affected by the plant disaster. Thus even if all these loans are assumed to default, in addition to those loans backed by properties in the flood-affected areas , the negative impact on deals would still be limited.

Moody's future monitoring will focus on the following:

1) any further deterioration in the situation at the Fukushima nuclear power plant,

2) any damages caused by strong aftershocks,

3) any deterioration in the apartment leasing businesses due to the medium- and long-term economic effects in the affected areas (though Moody's see it less likely), and

4) any geomorphic changes(such as land sinking), which would make reconstruction difficult or make collateral properties unusable.

However, with regard to item(3), the apartment leasing businesses in some areas may even improve, as demand for the apartments not destroyed from those who have lost their homes, as well as those who are working on the reconstruction of the affected areas, is likely to rise.

Moody's will monitor all of these risk factors and continue to gather information on: (1) the extent of any damages to the collateral properties, (2) the safety of the buildings' owners -- the loan obligors, (3) the policies or guidelines of Daito, Leopalace, etc. regarding payments of master lease rents for damaged apartments, as well as actual payments.

Moody's does not believe that it needs to take negative rating actions on any of the rated apartment loan RMBS at this stage. However, if any of these risks materialize, or if Moody's obtains any new information that may have an adverse impact on the ratings, negative actions may ensue.

Tokyo
Hiroyuki Kato
Asst Vice President - Analyst
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: No rating actions on apartment loan RMBS due to Japan's quake for now
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