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Rating Action:

Moody's upgrades ratings on four classes of notes issued by two Japanese apartment loan securitizations

 The document has been translated in other languages

29 Mar 2022

Tokyo, March 29, 2022 -- Moody's Japan K.K. has upgraded the ratings of the Class C, D and E notes issued by Leopard One Funding Limited, and the Class C notes issued by Leopard Two Funding Limited. Please see below for the full list of affected notes and transactions.

The affected ratings are as follows:

(1) Transaction name: Leopard One Funding Limited

....JPY550M Class C Notes, Upgraded to Aa2 (sf); previously on March 29, 2018, upgraded to A1 (sf)

....JPY550M Class D Notes, Upgraded to Baa1 (sf); previously on October 8, 2020, confirmed at Baa2 (sf)

....JPY151M Class E Notes, Upgraded to Baa3 (sf); previously on October 8, 2020, confirmed at Ba1 (sf)

(2) Transaction name: Leopard Two Funding Limited

....JPY520M Class C Notes, Upgraded to Aa3 (sf); previously on November 14, 2018, upgraded to A1 (sf)

Underlying Assets: Apartment loans

RATINGS RATIONALE

Today's rating actions are prompted by the increased credit enhancement of the affected notes following the redemption of the notes in a sequential manner that starts with the most senior class, followed by the junior classes.

The apartment buildings -- which are the mortgaged properties of the underlying loans -- were built by the same property builder, who also acts as the master lessee, property manager and paying agent. Moody's has also considered the negative impact on the rental performance of the apartment buildings of the slow progress made in the inspection and repair of the apartment building defects by the builder. According to the latest report from the builder [1], approximately 50% of the inspections for the apartment buildings in each transaction have been completed as of September 2021, which has only progressed slightly since Moody's last rating action in October 2020. The builder first announced in 2018 that it had found defects in its apartment buildings.

The builder has set the repair completion target date for obvious defects (according to the definition of the builder) at end-2024. However, considering the slow repair progress to date, significant uncertainty remains around the timing of repairs. Vacancy rates of the apartment buildings in the deals have remained at high levels since the builder first announced in 2018 that it had found defects. Similarly, the vacancy rate for the builder's portfolio is 17.4% as of February 2022, and once reached 22.9% in December 2020, from 7.2% in April 2018 before the defects were found. The repayment of the apartment loans relies on rent collections from the apartment buildings, which makes vacancy rates a key factor in evaluating the credit quality of the apartment loans. The lender of the apartment loan can only have recourse to the apartment building and not to the borrower. The later the repairs occur, the more difficult it will be to attract new tenants considering that the apartment buildings are mostly more than 17 years old. Moody's has considered these factors and has assumed that vacancy rates will deteriorate from current levels in conducting its apartment loans' debt service coverage ratio analysis.

On the other hand, the recovery rate from the apartment buildings should be high even without giving credit to the building value, because loan amortization started since the transactions closed more than 17 years ago.

This rating action also considered the sensitivity of the senior notes under a stressed scenario where the builder is bankrupt with apartment buildings left unrepaired. As the builder is the master lessee and paying agent in both transactions, the master lease and paying agent agreement would be terminated. Under this scenario, loan defaults may increase significantly and occur in a concentrated manner.

Moody's has conducted a cash flow analysis under various sensitivity scenarios including considering a higher correlation between loan defaults, and captured the significant asset concentration present in the simulated portfolio default distribution.

Since closing, the floating interest rate due on the underlying loans and the notes had been referring to the six-month Japanese yen Libor, which was discontinued on 31 December 2021. At this point in time, the transaction parties have not changed the reference interest rate by contract amendment.

The notes' coupon, which is governed by and construed in accordance with English law, refers to the synthetic yen Libor (which is calculated as TORF + adjustment spread), as per the Critical Benchmarks Bill framework. For the underlying loan side, the applicable interest rate refers to the TORF + adjustment spread, following the notification sent out by the lender. Thus, there should be no interest rate mismatch risk in 2022.

However, given that the synthetic yen Libor is planned to cease at the end of 2022, there is a likelihood of interest rate mismatch risk after 2022, when the notes' coupon may refer to a floating rate quoted by reference banks or be fixed at the last applied rate. Moody's has considered the risk that the note coupons may be fixed at a high end while underlying loans continue to range at low levels.

The rating action reflects the positive effects from increased credit enhancement after taking into account the abovementioned risks and Moody's expectation for loan performance.

The principal methodology used in these ratings was "Moody's Global Approach to Rating SME Balance Sheet Securitizations (Japanese)" published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1264374. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the ratings:

Factors that would lead to a rating upgrade or downgrade include developments around the builder's financial condition, apartment buildings' repair completion and vacancy rates, which would lead to an improvement or a deterioration in the credit quality of the apartment loans, and the amount of credit enhancement available for each class of notes.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Builder report provided by servicer

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.

Chiharu Nagayoshi
Analyst
Structured Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Marie Lam
Associate Managing Director
Structured Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

No Related Data.
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