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Related Research
Rating Action:

Moody's assigns provisional ratings to Trust Beneficial Interest (201907) backed by residential mortgages

 The document has been translated in other languages

08 Jul 2019

JPY110 billion in Debt Securities affected

Tokyo, July 08, 2019 -- Moody's SF Japan K.K. has assigned provisional ratings to Trust Beneficial Interest (201907) backed by residential mortgage loans.

Moody's issues provisional ratings in advance of the final sale of the securities. These ratings, however, represent Moody's preliminary credit opinions only. Upon a conclusive review of the transaction and associated documentation, Moody's will endeavor to assign definitive ratings to the securities. Definitive ratings may differ from provisional ratings.

The complete rating action is as follows:

Transaction Name: Trust Beneficial Interest (201907)

Class, Issue Amount, Scheduled Dividend Rate/Interest Rate, Rating

Class I Senior Beneficial Interests, JPY75 billion, Floating, (P)Aaa (sf)

Tokkin ABL, JPY35 billion, Floating, (P)Aaa (sf)

Total Issue Amount: JPY110 billion

Closing Date: July 26, 2019

Final Maturity Date: March 31, 2057

Underlying Asset: Residential mortgage loans

First Trustee/ Second Trustee: The Norinchukin Trust and Banking Co., Ltd.

Arranger: The Norinchukin Trust and Banking Co., Ltd.

Credit Enhancement: The senior/subordinated structure and excess spread available.

Subordination: Approx. 18.2%

RATINGS RATIONALE

The Seller entrusts a pool of its residential mortgage loans, all related rights and cash to the First Trustee. In turn, the Seller receives the Class I Senior Beneficial Interests and the Class II Senior Beneficial Interests (collectively, "Senior Beneficial Interests"), the Class B Beneficial Interests, the Seller's Beneficial Interests and the Subordinated Beneficial Interests.

Entrustment of the residential mortgage loans is perfected against third parties via registration pursuant to the Perfection Law. Perfection against obligors of the receivables is not made unless certain events occur.

The Seller has established first security interests (mortgages) on the collateral properties. The First Trustee holds the security interests in accordance with the entrustment of the loans. Transfer of the ownership of the security interests is not perfected by registration unless certain events occur.

The Seller's Beneficial Interests are backed by a cash reserve that will cover liquidity risk, commingling risk, set-off risk, registration expenses for the transfer of the ownership of the security interest and fees relating to the start of back-up servicer operations and so forth.

The Seller retains the Class B Beneficial Interests, the Seller's Beneficial Interests and the Subordinated Beneficial Interests, and sells the Class I Senior Beneficial Interests to beneficial interest investors and the Class II Senior Beneficial Interests to the Second Trustee. The transfer of the Senior Beneficial Interests is perfected against relevant obligors and third parties under Article 94 of Japan's Trust Law.

The Tokkin Settlor entrusts cash to the Second Trustee. The Second Trustee receives limited recourse loans, the Tokkin ABL, from ABL investors. The proceeds are used to purchase the Class II Senior Beneficial Interests.

The Seller acts as the initial servicer, under the Servicing Agreement with the First Trustee.

The transaction does not have a third-party Back-up Servicer in place that can take over actual servicing operations. However, the First Trustee appoints an eligible Back-up Servicer by entering into a new servicing agreement if any servicer replacement preparation events occur.

Special Servicer is appointed, under the Special Servicing Agreement with the First Trustee. The First Trustee appoints an eligible Back-up Special Servicer by entering into a back-up special servicing agreement if any special servicer replacement preparation events occur.

Principal redemption is made in a sequential manner. After the Senior Beneficial Interests are fully redeemed, the Class B Beneficial interests, the Seller's Beneficial Interests and the Subordinated Beneficial Interests are then redeemed in this order. The Class I Senior Beneficial Interests and the Class II Senior Beneficial Interests are redeemed on a pari passu basis.

The dividend and principal collections of the Class II Senior Beneficial Interests are allocated to the interest and principal payments on the Tokkin ABL.

Interest collections (after paying expenses and dividends) are transferred to the Principal Account up to the aggregate amount of the outstanding balance of defaulted loans -- excluding the aggregate amount of these loans which are repurchased by the Seller (defaulted trapping mechanism).

If any accelerated amortization events occur, the dividends waterfall to the Class B Beneficial Interests, the Seller's Beneficial Interests and the Subordinated Beneficial Interests are suspended, and the excess spread is used to redeem the Senior Beneficial Interests. Key accelerated amortization events include a servicer replacement event occurring and the accumulated default amount exceeding the trigger.

The interest type of underlying assets is floating rate with the option to convert to fixed rate. Interest rate on a portion of the loan portfolio are fixed at closing and thus the transaction has an asset-liability interest rate mismatches. The rated notes are exposed to the risk that the base interest rate increases significantly which could lead to negative carry. The negative carry risk is mitigated by the credit enhancement provided by the senior/subordinated structure.

A cash reserve is funded to provide liquidity for shortages in scheduled dividend payments of the Senior Beneficial Interests as well as trust fees, registration expenses for the transfer of the ownership of the security interest, fees relating to the start of back-up servicer operations and so forth.

The ratings are based mainly on the credit quality of the receivables, the transaction structure, and the servicer's experience.

Having analyzed both the obligors' attributes and the originator's historical performance, Moody's estimated an expected cumulative gross loss rate of 2.8%. Moody's also determined its portfolio Expected Loss (EL) of 1.1% and MILAN Credit Enhancement (CE) of 7.1%. In addition, Moody's used the portfolio EL and the MILAN CE to determine a probability loss distribution and conducted a cash flow analysis with multiple portfolio loss scenarios of the distribution.

Moody's assumes that, given the structure of the transaction as well as other factors, the risk of interruption to the cash flow from the assets in the event of the seller's or the First Trustee's bankruptcy is sufficiently minimized to achieve the ratings assigned.

Moody's considers the seller sufficiently capable of servicing the pool, having taken into account the seller's business experience and the servicing operations.

The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" (Japanese) published in June 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to a downgrade of the ratings:

The primary factors that could lead to a downgrade of the ratings are worse performance of the underlying assets than Moody's expected.

Moody's has also conducted the sensitivity analysis below which provides the number of notches by which the model-indicated output of the deal would have varied if different assumptions had been made as to certain key model parameters. The analysis assumes that the deal has not aged.

If the expected cumulative gross loss rate and the MILAN CE were changed from 2.8%/7.1% to 3.4%/8.5% and 4.2%/10.7% and other assumptions remained unchanged, the model-indicated output of the Class I Senior Beneficial Interests and the Tokkin ABL would change by 0 and 1 notches respectively.

The analysis results are model-indicated outputs, which are one of the many quantitative and qualitative factors considered by rating committees in determining actual ratings. This analysis does not intend to measure how the rating of the deal might migrate over time, but rather, how the initial model-indicated output of the deal might have differed if certain key model parameters had been varied.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's SF Japan K.K. is a registered credit rating agency under the Financial Instrument and Exchange Act but not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore the credit ratings assigned by Moody's SF Japan K.K. are Registered Credit Ratings to the FSA, but are not NRSRO Credit Ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Shinichiro Kan
VP - Senior Credit Officer
Structured Finance Group
Moody's SF Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4220
Client Service: 81 3 5408 4210

Yusuke Seki
Associate Managing Director
Structured Finance Group
JOURNALISTS: 81 3 5408 4220
Client Service: 81 3 5408 4210

Releasing Office:
Moody's SF Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4220
Client Service: 81 3 5408 4210

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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