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04 Aug 2010
Tokyo, August 04, 2010 -- Moody's Investors Service has upgraded the ratings of two Japan SME CLOs
by the Japan Finance Corporation (JFC, formerly, Japan Finance
Corporation for Small and Medium Enterprise).
Today's rating actions are as follows:
- CLO in September 2006 of Regional Financial Institutions
JPY 10,500,000,000 Senior Trust Certificates,
upgraded to Aaa (sf); previously on May 14, 2010, upgraded
to Aa1 (sf) from A1 (sf) placed under review for possible upgrade
JPY 250,000,000 Mezzanine Trust Certificates, upgraded
to Aa3 (sf); previously on May 14, 2010, upgraded to
Baa1 (sf) from Ba2 (sf) placed under review for possible upgrade
- Synthetic CLO of Regional Financial Institutions (Tanpopo 2008,
LLC) (including Kumamoto Prefecture CLO 2007)
JPY 800,000,000 Series One Class B Unsecured Notes,
Upgraded to Aaa (sf); previously on February 5, 2010,
upgraded to Aa3 (sf) from A1 (sf)
The first deal is a cash CLO transaction 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. The second deal is a synthetic
CLO transaction referencing corporate loans for SMEs that were originated
by financial institutions under JFC's "purchase scheme" program.
In both cases, the SME loans were originated with the intention
to securitize them.
Today's actions reflect primarily the improvement in credit enhancement
due to deal amortization.
Moody's notes that the business environment for SMEs has been improving,
although they are still under difficult conditions compared with that
for large companies. The financing environment for SMEs has also
improved substantially, thanks in part to the government support
for SME financing in addition to the general economic recovery.
Therefore, the number of bankruptcies has decreased since April
2009. Moody's expects that the circumstances surrounding SMEs will
be generally stable, as the Japanese economy continues to recover
and the government support for SME financing remains effective until the
end of FY2010. As a result, Moody's does not believe that
a large increase in SME defaults is likely for the near term. Nevertheless,
Moody's remains cautious about the business environment for SMEs,
taking into account financial institutions' lending attitude after
the expiration of the loan extended maturities under the loan repayment
moratorium law for SMEs.
Moody's observes that the portfolio default rate of SME CLOs by JFC was
low in Q2 2010 and the same as that in FY2009. Short-term
delinquencies (three months or less delinquency) continue to occur in
most transactions at the same levels as in FY2009, while for a few
transactions, they have decreased.
Furthermore, most short-term delinquencies have become long-term
delinquent. Moody's estimates that more than half of the current
long-term delinquencies will default, or at least remain
delinquent until maturity. The rest will likely catch up with their
payments, or be bought back by the originators. Moody's expects
this trend to last through the end of FY2010 as long as the economic trend
and financing environment do not change dramatically. As a result,
Moody's maintains the same expected default rate assumption of each transaction
as determined previously and described in details in Moody's Special Report,
"Japan SME CDO Rating Monitoring: June 2010 Update, " June
In reaching its rating decision, Moody's takes into account the
expected default rates, outstanding delinquency trends and changes
in credit enhancement, which comprise current subordination and
The following summarizes the key performance trend and expected default
rates for the affected transactions:
- CLO in September 2006 of Regional Financial Institutions
In Q2 2010, two defaults, or approximately JPY 34 million,
have occurred, slightly higher than our expectation. The
outstanding number of long delinquent loans as of the end of June 2010
is seven, or approximately JPY 142 million. In addition,
five short-term delinquencies have newly occurred mainly in the
regional financial institutions' pool, although their impact
on ratings is limited because the amount was small.
Moody's expects that the performance of this pool will continue to stabilize
and the expected default rate for the underlying pool will be around 2%.
For this transaction, the subordination ratio is expected to continue
to increase, stemming from the amortization of the underlying loans.
The increase in subordination ratio will continue even if the default
rate stays above our expectation, thanks to the shortening life
to maturity and amortization.
- Tanpopo 2008
In Q2 2010, seven credit events, or approximately JPY 60 million,
have occurred, well within our expectation. Newly occurred
delinquencies also decreased, down to 14 (approximately JPY 210
million) from 21 in Q1 2010. Its occurrence rate remains at approximately
Although the credit event rate and delinquency occurrence rate have reversed
from increasing in the past to decreasing currently, the expected
credit event rate for the underlying pool will be around 4-5%,
because some outstanding delinquencies may turn into credit events.
The subordination ratio is also expected to increase, stemming from
the amortization of the referencing loans, and shortening remaining
life of the transaction, which is approximately eight months.
The principal methodology used in monitoring these transactions is "Moody's
Approach to Rating Japan SME CDOs," which can be found at www.moodys.com
in the Research & Ratings directory, in the Rating Methodologies
subdirectory. Other methodologies and factors that may have been
considered in the process of rating this issue can also be found in the
Rating Methodologies subdirectory. 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 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.
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
Moody's Japan K.K.
Moody's upgrades two Japan SME CLOs by Japan Finance Corp
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
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