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Rating Action:

Moody's places 228 tranches of 50 Japanese CMBS deals on review for possible downgrade

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 backing loans.

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 today.

A list of the transactions and tranches affected can be found at the link below:

www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBS_SF161979

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 is it acting on behalf of the offering party. This release is not a solicitation or a recommendation to buy, hold, or sell securities.

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1076; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7 495 228 60 60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Craig Jamieson in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

Tokyo
Toshihide Miyagawa
Vice President - Senior Analyst
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Koji Kumamaru
Managing Director
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
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