Tokyo, November 05, 2010 -- Moody's Japan K.K. has today upgraded the ratings on four
Japan SME CLOs by the Japan Finance Corporation (JFC, formerly,
Japan Finance Corporation for Small and Medium Enterprise).
The complete rating actions are as follows:
- CLO in September 2006 of Regional Financial Institutions
JPY 250,000,000 Mezzanine Trust Certificates, upgraded
to Aaa (sf);
Previously on August 4, 2010, upgraded to Aa3 (sf) from Baa1
(sf)
- CLO in September 2007 of Regional Financial Institutions
JPY 400,000,000 Mezzanine Trust Certificates, upgraded
to Aa3 (sf);
Previously on April 30, 2009, downgraded to A3 (sf) from A2
(sf)
- CLO in December 2007 of Regional Financial Institutions
JPY 340,000,000 Mezzanine Trust Certificates, upgraded
to Aa1 (sf);
Previously on February 5, 2010, upgraded to Aa3 (sf) from
A2 (sf)
- March 2008 Regional Financial Institutions CLO
JPY8,400,000,000 Senior Trust Certificates, upgraded
to Aa1 (sf);
Previously on April 30, 2009, downgraded to Aa3 (sf) from
Aaa (sf)
JPY460,000,000 Mezzanine Trust Certificates, upgraded
to Baa2 (sf);
Previously on April 30, 2009, downgraded to Ba3 (sf) from
A2 (sf)
Deal Name: CLO in September 2006 of Regional Financial Institutions
Issue Amount: JPY 250,000,000 Mezzanine Trust Certificates
Dividend: Fixed
Closing Date: September 27, 2006
Final Maturity Date: October 15, 2012
Underlying Asset: SME loans
Trustor: Japan Finance Corporation (Aa2)
Originator/Initial Servicer: The Kanagawa Bank, Ltd.,
The Ehime Bank, Ltd., The Kumamoto Family Bank,
Ltd., Fukui Shinkin Bank, The Hekikai Shinkin Bank,
Bisai Shinkin Bank, Nagahama Shinkin Bank, Yonago Shinkin
Bank and Japan Finance Corporation
Arranger: Daiwa Securities Capital Markets Co. Ltd.
Deal Name: CLO in September 2007 of Regional Financial Institutions
Issue Amount: JPY 400,000,000 Mezzanine Trust Certificates
Dividend: Fixed
Closing Date: September 26, 2007
Final Maturity Date: October 15, 2013
Underlying Asset: SME loans
Trustor: Japan Finance Corporation (Aa2)
Originator/Initial Servicer: Bizen Shinkin Bank, Japan Finance
Corporation
Arranger: Nomura Securities Co., Ltd.
Deal Name: CLO in December 2007 of Regional Financial Institutions
Issue Amount: JPY 340,000,000 Mezzanine Trust Certificates
Dividend: Fixed
Closing Date: December 26, 2007
Final Maturity Date: January 15, 2014
Underlying Asset: SME loans
Trustor: Japan Finance Corporation (Aa2)
Originator/Initial Servicer: The Ehime Bank, Ltd.,
Japan Finance Corporation
Arranger: Citigroup Global Markets Japan Inc.
Deal Name: March 2008 Regional Financial Institutions CLO
Issue Amount: JPY 8,400,000,000 Senior Trust Certificates
Dividend: Fixed
Closing Date: March 25, 2008
Final Maturity Date: April 15, 2014
Underlying Asset: SME loans
Issue Amount: JPY 460,000,000 Mezzanine Trust Certificates
Dividend: Fixed
Closing Date: March 25, 2008
Final Maturity Date: April 15, 2014
Underlying Asset: SME loans
Trustor: Japan Finance Corporation (Aa2)
Originator/Initial Servicer: RUMOI SHINKIN BANK, Japan Finance
Corporation
Arranger: Mitsubishi UFJ Morgan Stanley Securities Co.,
Ltd.
These are cash CLO transactions backed by corporate loans in the form
of (1) SME loans originated by regional financial institutions and purchased
by JFC under its "purchase scheme" securitization program, and (2)
SME loans originated by JFC under its "self-origination scheme"
securitization program. In both cases, the SME loans were
originated for securitization.
RATING RATIONALE
Today's action reflects the improvement in credit enhancement due
to deal amortization.
The main factor for the uncertainty in Moody's analysis is the macroeconomic
environment for SMEs as well as the financing environment.
As for Japanese economy, its recovery pace is slowing because of
weak domestic demand and waning overseas demand as well as the appreciating
yen. In spite of the tougher business environment, the number
of SME bankruptcies has stabilized and is at a five-year low,
due to the government support for SME financing.
However, the financing environment for SMEs will become tougher
when the government ends the emergency guarantee program at end-March
2011. Taking into consideration the uncertainty about the economic
recovery, Moody's therefore believes that the number of bankruptcies
will rise gradually from the current low level.
In addition to the lending attitudes of financial institutions,
Moody's also pays attention to any extension by the government of
the Loan Repayment Moratorium Law, which expires at the end of March
2011.
The increase in bankruptcies will be curbed if the law and the Financial
Services Agency's basic guidelines and policies for financial inspections
are maintained. If they are revised or cancelled, the number
of bankruptcies may increase at a higher rate than Moody's expects,
starting in April 2011.
Cash CLO series by Japan Finance Corporation
The portfolio default rate for JFC SME CLOs has been a little higher since
last April than in FY2009. New delinquencies continue to occur
in most transactions and most of the existing delinquencies have become
long-term in nature.
Moody's estimates that more than half of current long-term delinquencies
will default by, or at least remain delinquent, until maturity.
The remainder will probably catch up with payments, or be bought
back by their originators. Moody's expects this situation to persist,
so long as the tough business and financing environment prevails.
Moody's expects the number of corporate bankruptcies to increase
gradually from now on, a factor it has incorporated into the rating
analysis.
As a result, Moody's is maintaining its current default rate assumption
for each transaction, as described in Moody's Special Report,
"Japan SME CDO Rating Monitoring: June 2010 Update."
In its rating analysis, Moody's takes into account expected default
rates, the outstanding delinquency rates, and changes in credit
enhancement, which comprise current subordination and excess spread,
using the CDOROM model.
The following summarizes the key performance trends and expected default
rates for the affected transactions:
- CLO in September 2006 of Regional Financial Institutions
Since April 2010, there have been three defaults (JPY 49 million),
as stated in Moody's assumptions. There were also six short-term
(JPY 48 million) and eight long-term delinquencies (JPY 109 million).
At the end-September 2010, there were 14 delinquencies (JPY
157 million). Moody's expects the default rate for the underlying
pool to be around 2%, as some current delinquencies may yet
default.
Because of the amortization of the underlying loans, the subordination
ratio for the mezzanine tranche has increased to 13.9% as
of end-September 2010, from 11.8% at end-June
2010.
- CLO in September 2007 of Regional Financial Institutions
Since last April, two defaults (JPY 37 million), have occurred,
which is lower than Moody's assumption. However, two
short-term delinquencies (JPY 36 million) occurred in the previous
quarter.
There were 9 delinquencies (JPY 287 million), including seven (JPY
251 million) long-term delinquencies, as of end-September
2010. Moody's expects the default rate for the underlying pool
to be around 2-3% as some delinquencies may yet default.
As a result of amortization, the subordination ratio for the mezzanine
tranche has increased to 15.1% as of end-September
2010, from 12.0% at end-March 2009.
- CLO in December 2007 of Regional Financial Institutions
Since April 2010, two defaults (JPY 53 million) have occurred,
which is lower than assumed. However, delinquencies continue
to occur and two short-term delinquencies (JPY 65 million) have
occurred in the third quarter 2010.
There were 10 delinquencies (JPY 296 million), including eight long-term
delinquencies (JPY 231 million), as of end-September 2010.
Moody's expects the default rate for the underlying pool to be around
2-3%, as some delinquencies may yet default.
Because of amortization, the subordination ratio for the mezzanine
tranche has increased to 18.0% as of end-September
2010, from 14.8% at end-December 2009.
- March 2008 Regional Financial Institutions CLO
Since April 2010, three defaults (JPY 95 million) have occurred,
about in line with Moody's assumptions.
Delinquencies continue to occur and one short-term delinquency
(JPY 11 million) occurred in the third quarter of 2010. However,
as three delinquencies (JPY 105 million) were redeemed before the loans
matured, the number of delinquencies declined to six (JPY 250 million)
at end-September 2010, including five long-term delinquencies
(JPY 239 million).
Moody's expects that the default rate for the underlying pool to be around
3%, as some delinquencies may yet default.
Because of amortization, the subordination ratio for the mezzanine
tranche has increased to 11.5% as of end-September
2010, from 10.4% at end-December 2009.
The principal methodology used in this rating was "Moody's Approach to
Rating Japan SME CDOs" published on September 30, 2010 on www.moodys.co.jp.
In this rating process, Moody's may have considered other
factors. In addition, Moody's publishes a weekly summary
of structured finance credit, ratings and methodologies, available
to all registered users of our website, at www.moodys.com/SFQuickCheck.
Moody's did not receive or take into account a third party due diligence
report on the underlying assets or financial instruments related to the
monitoring of this transaction in the past six months.
REGULATORY DISCLOSURES
Credit ratings are Moody's current opinions of the relative future
credit risk of entities, credit commitments, or debt or debt-like
securities. Moody's defines credit risk as the risk that
an entity may not meet its contractual, financial obligations as
they come due and any estimated financial loss in the event of default.
Credit ratings do not address any other risk, including but not
limited to: liquidity risk, market value risk, or price
volatility. Credit ratings do not constitute investment or financial
advice, and credit ratings are not recommendations to purchase,
sell, or hold particular securities. No warranty, express
or implied, as to the accuracy, timeliness, completeness,
merchantability or fitness for any particular purpose of any such rating
or other opinion or information is given or made by Moody's in any
form or manner whatsoever.
The credit risk of an issuer or its obligations is assessed based on information
received from the issuer or from public sources. Moody's
adopts all necessary measures so that the information it uses in assigning
a credit rating is of sufficient quality and from sources Moody's
considers to be reliable. However, Moody's is not an
auditor and cannot in every instance independently verify or validate
information received in the rating process. Moody's may change
the rating when it deems necessary. Moody's may also withdraw
the rating due to insufficient information, or for other reasons.
For an explanation of the (sf) indicator, please see "Moody's
Structured Finance Rating Scale" on www.moodys.com.
The principal information used to prepare the credit rating comprised
Servicing Report, Trustee Report and Summary Report by JFC.
Information sources used to prepare the credit rating are the following
parties involved in the ratings (such as the Originator, the Servicer
and the Trustee); public information; and confidential and proprietary
Moody's information.
Measures taken to ensure the quality of this information include representations
and warranties provided by the information sources.
Moody's considers the quality of information available on the issuer
or obligation satisfactory for the purposes of maintaining a credit rating.
Moody's Japan K.K. is a credit rating agency registered
with the Japan Financial Services Agency and its registration number is
FSA Commissioner (Ratings) No. 2.
The Financial Services Agency has not imposed any supervisory measures
on Moody's Japan K.K. in the past year.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Tokyo
Shinji Yoshizawa
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.
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Moody's upgrades four Japan SME CLOs by Japan Finance Corp
