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14 Apr 2009
228 tranches of Japanese CMBS affected
Tokyo, April 14, 2009 -- Moody's Investors Service announced that it has updated its key surveillance
assumptions for the monitoring of Japanese CMBS ratings. As a result,
it has placed on review for possible downgrade 228 tranches with an original
balance of JPY 970 billion of 50 Japanese CMBS deals. The review
was prompted by Moody's view that the turmoil affecting the Japanese CMBS
market might be continued for a sustained period of time. It had
already placed on review for possible downgrade other 111 tranches with
an original balance of JPY 470 billion of 17 deals. The aggregate
tranches on review for possible downgrade are 339 with an original balance
of JPY 1.44 trillion of 57 deals. Moody's intends to conclude
its review in about a month.
As of January 2009, official commercial and residential land prices
in Japan published by Japanese Government showed their first decline (on
average) since 2005. In the three major metropolitan districts,
Tokyo, Osaka and Nagoya, the average price of commercial land
declined for the first time since 2004. One of the primary reasons
for these declines was the limited availability of debt financing among
potential real estate purchasers, resulting from difficulties in
the lending markets. Moody's believes this financial environment
will persist for the next couple of years and real estate transaction
volume will remain at low levels. Moody's is concerned that with
a Japanese economic recession and a GDP contraction forecasted this year,
the overall fundamentals for commercial real estate may show downward
trends, and that real estate prices may remain at stressed levels
until the lending market returns to functioning in a normal way.
Under the current liquidity circumstances in Japan, there are a
limited number of lenders as compared to prior periods. They are
more selective in their new loan origination as well as refinancing and
will typically only make loans of modest-leverage and sponsored
by strong corporate names. As a result, Moody's views that
the overall refinancing probability of existing CMBS borrowers is declining
precipitously. Additionally, some weaker asset managers and
borrower sponsors have gone bankrupt over the past year and will be facing
financial difficulties in the near term. In some cases, these
corporate-credit events trigger an event of default for the CMBS
The number and amount of delinquent loans in Moody's rated Japanese CMBS
have increased since June 2008, when we observed the first loan
delinquency in the segment. As of the end of March 2009,
there were 25 delinquent loans, with an aggregate loan amount of
approximately JPY 110 billion. Of the total number of outstanding
loans, approximately 230 (amounting to JPY 1,720 billion)
will mature in 2009 and 2010. Unless lending conditions change,
a relatively large number of these maturing loans could become delinquent.
Moody's has updated its key surveillance assumptions for the monitoring
of Japanese CMBS ratings in order to better reflect the impact of the
negative credit environment on ratings. This process comprises
applying higher stress on the recovery or expected collection amount of
loans with limited refinancing support and a high likelihood of default,
including those sponsored by small or medium-sized Japanese enterprises
or by foreign real estate funds with limited refinancing track records
and maturing in 2009 or 2010. We also include loans sponsored by
newly established Japanese real estate companies with an event of default
clause, triggered by a sponsor's corporate credit event.
The recovery stress will be at most , 20% to 30% of
the initial property value, depending on when a loan was originated.
Moody's will apply its recovery stress assumptions at the appropriate
levels based on its disposition price data found in its CMBS monitoring
process. However, since the stress level for each loan depends
on property type, location, historical performance and Moody's
initial assessment, we will carefully determine each loan's
stress level individually.
In its rating review, Moody's has analyzed all the key rating drivers
initially incorporated in each deal and then applied its updated assumptions
deal by deal. Moody's expects that the number and proportion of
downgraded tranches and the magnitude of downgrades will differ depending
on the current rating. Moody's estimates that 20% to 30%
of Aaa classes will be downgraded by 1 to 3 notches, 40%
to 50% of Aa classes will be downgraded by 1 to 3 notches,
50% to 60% of A classes will be downgraded by 1 to 4 notches,
and that 70% to 80% of Baa or lower classes will be downgraded
by 1 to 6 notches. The magnitude of these downgrades will depend
on property type, location, sponsor's refinancing probability,
vintage, proportion of liquidating loans, and payment structure.
For more detail, please see Moody's Rating Methodology, "Methodology
Update: Surveillance Assumptions for Japanese CMBS", published
A list of the transactions and tranches affected can be found at the link
The principal methodologies used in rating and monitoring the transactions
are "Moody's Approach to Monitoring CMBS Ratings in Japan" (October 2005)
and "Methodology Update: Surveillance Assumptions for Japanese CMBS"(April
2009), which can be found at www.moodys.com in the
Credit Policy & Methodologies directory, in the Ratings Methodologies
subdirectory. Other methodologies and factors that may have been
considered in the process of rating this issue can also be found in the
Credit Policy & Methodologies directory.
Moody's Investors Service is a publisher of rating opinions and research.
It is not involved in the offering or sale of any securities, nor
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a solicitation or a recommendation to buy, hold, or sell securities.
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Vice President - Senior Analyst
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's places 228 tranches of 50 Japanese CMBS deals on review for possible downgrade
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
No Related Data.
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