Tokyo, April 28, 2011 -- Moody's Japan K.K. has upgraded its ratings on three Japan
SME CLOs by the Japan Finance Corporation (JFC; formerly, Japan
Finance Corporation for Small and Medium Enterprise).
Details follow:
- CLO in June 2007 of Regional Financial Institutions
JPY 11,900,000,000 Senior Trust Certificates,
upgraded to Aaa (sf);
Previously on February 2, 2011, upgraded to Aa1 (sf) from
A1 (sf)
JPY 180,000,000 Mezzanine Trust Certificates, upgraded
to Aa3 (sf);
Previously on February 2, 2011, upgraded to A3 (sf) from Ba1
(sf)
- CLO in September 2007 of Regional Financial Institutions
JPY 400,000,000 Mezzanine Trust Certificates, upgraded
to Aaa (sf);
Previously on November 5, 2010, upgraded to Aa3 (sf) from
A3 (sf)
- March 2008 Regional Financial Institutions CLO
JPY460,000,000 Mezzanine Trust Certificates, upgraded
to Aa3 (sf);
Previously on February 2, 2011, upgraded to A3 (sf) from Baa2
(sf)
Deal Name: CLO in June 2007 of Regional Financial Institutions
Issue Amount: JPY 11,900,000,000 Senior Trust
Certificates
Dividend: Fixed
Closing Date: June 28, 2007
Final Maturity Date: July 16, 2013
Underlying Asset: SME loans
Issue Amount: JPY 180,000,000 Mezzanine Trust Certificates
Dividend: Fixed
Closing Date: June 28, 2007
Final Maturity Date: July 16, 2013
Underlying Asset: SME loans
Trustor: Japan Finance Corporation (Aa2)
Originator/Initial Servicer: The Ehime Bank, Ltd.,
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: March 2008 Regional Financial Institutions CLO
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 (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 loans were originated for securitization.
RATING RATIONALE
Today's actions reflect the improvement in credit enhancement due
mainly 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.
Since the March 11 quake, the Japanese economy has been under the
downward pressure, in light of concerns about declines in production
and consumption over the short term.
The business environment for SMEs, which had been improving before
the disaster, is also being negatively affected, depending
on region and industry. Thus, the disaster could be the reason
for the increase in SME bankruptcies, at least in the short term.
However, Moody's believes that the government's quick
reaction with regard to supporting SME funding will help the SMEs avert
bankruptcy, at least in the short term. The government provides
funding support through the safety net lending program and a guarantee
program (No.5; regarded as an extension of the emergency guarantee
program). The SMEs also receive funding support from financial
institutions in accordance with the SME moratorium law.
Furthermore, SMEs affected by the disaster can also obtain disaster
recovering funding, the disaster-related guarantee program
by Credit Guarantee Corporation, and other disaster-related
support programs run by regional governments.
Moody's considers it especially important to note that administrative
processes in financial institutions were already in place because support
schemes such as an emergency guarantee program and SME moratorium law
were available before the quake occurred. Thus, the implementation
of these support programs should be smooth, in contrast to the experience
during global financial crisis.
Moreover, in light of the significant demand for goods and services
expected later in the year (especially around the disaster area),
Moody's believes that a substantial number of SMEs will be able
to avert bankruptcy in the near term and that a large increase in SME
bankruptcy numbers is thus unlikely.
Moody's also notes the ongoing concerns about prolonged power shortages
and the resolution of the problems at the Fukushima Dai-ichi nuclear
power plant. Moody's will keep a very close watch on both
situations, as well as on any changes in the banks' lending
attitudes, domestic and foreign demand, and the foreign exchange
market, which can affect the SME business environment.
Cash CLO series by Japan Finance Corporation
The portfolio default rate for JFC SME CLOs has risen since last April,
on an increase in defaults in the first quarter of FY2011, most
of which were out of long-term delinquencies. Defaults of
normal assets and short-term delinquencies in FY2010 were almost
same as FY2009.
New delinquencies still continue to occur in most transactions,
and most of the existing delinquencies have become long-term.
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,
as the business environment for SMEs will be severe for some time due
to the quake.
However, Moody's has already incorporated these delinquency
trends into its default rate assumption. As a result, Moody's
is maintaining its current default rate assumption (annualized 2-3%)
for most of JFC's transactions.
In its rating analysis, Moody's takes into account expected default
rates, outstanding delinquency rates, and changes in credit
enhancement, which comprise current subordination and excess spread,
using the CDOROM model.
Total exposures among JFC SME cash CLOs to Miyagi, Iwate,
and Fukushima prefectures severely affected by the quake is about 3%.
Moody's incorporates the impact into the current analysis.
The number of new delinquencies out of the affected area is from zero
to three in each transaction.
The following summarizes the key performance trends and expected default
rates for the affected transactions:
- CLO in June 2007 of Regional Financial Institutions
Since last April, six defaults (JPY 86 million) have occurred,
which is lower than Moody's assumptions. However, four
short-term delinquencies (JPY 30 million) took place in the previous
quarter.
There were 22 delinquencies (JPY 266 million), including 18 long-term
delinquencies (JPY 236 million), as of end-March 2011.
The amount declined from end-December 2010, only because
five delinquencies (JPY 74 million) resulted in default.
Moody's expects the default rate for the underlying pool to be around
3% (annualized) as delinquencies continue to occur and become long-term.
As a result of amortization, the subordination ratio for the mezzanine
tranche rose to 12.1% as of end-March 2011,
from 11.9% at end-December 2010.
- CLO in September 2007 of Regional Financial Institutions
Since April 2010, eight defaults (JPY 228 million) have occurred,
which is higher than Moody's assumptions. The delinquencies
also continue to occur, with two short-term delinquencies
(JPY 28 million) in the first quarter 2011.
However, outstanding delinquencies have largely declined from eight
(JPY 262 million) to five (JPY 118 million), including three long-term
delinquencies (JPY 90 million), because all the defaults occurred
in the previous quarter were out of long-term delinquencies.
Moody's expects the default rate for the underlying pool to be around
2% (annualized), as delinquencies continue to occur and become
long-term.
The subordination ratio for the mezzanine tranche fell to 13.9%
as of end-March 2011, from 15.1% at end-September
2010 due to defaults of some long-term delinquencies in the previous
quarter, although this was offset by the decline in delinquencies
in the rating analysis.
- March 2008 Regional Financial Institutions CLO
Since April 2010, five defaults (JPY 151 million) have occurred,
which is lower than Moody's assumption. However, delinquencies
continue to occur, with one short-term delinquency (JPY 9
million) in the first quarter of 2011.
Outstanding delinquencies have largely declined from eight (JPY 280 million)
to five (JPY 154 million), including four long-term delinquencies
(JPY 145 million) due to prepayments on two delinquent loans (JPY 73 million
equal to 2% of the outstanding loans) and defaults out of long-term
delinquencies.
Moody's expects the default rate for the underlying pool to be around
3% (annualized), as delinquencies continue to occur and become
long-term.
Because of amortization, the subordination ratio for the mezzanine
tranche rose to 12.8% as of end-March 2011,
from 12.6% at end-December 2010.
The principal methodology used in this rating was "Moody's Approach to
Rating Japan SME CDOs" published on September 30, 2010, and
available on www.moodys.co.jp.
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
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 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.
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 may change
the rating when it deems necessary. Moody's may also withdraw the
rating due to insufficient information, or for other reasons.
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.
Please see ratings tab on the issuer/entity page on the Moody's website
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 Credit Ratings were fully digitized and accurate
data may not be available. Consequently, Moody's 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 the Moody's website for further information.
Please see the Credit Policy page on the Moody's website 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 three Japan Finance Corp SME CLOs
