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Rating Action:

Moody's upgrades four Japan SME CLOs by Japan Finance Corp

 The document has been translated in other languages

Global Credit Research - 05 Nov 2010

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.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan

Moody's upgrades four Japan SME CLOs by Japan Finance Corp
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