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COMMENTS

Japanese Securitizations' 2019 First Half Rated New Issuance Worth About ¥1 Trillion; One Upgrade And One Downgrade


Japanese Securitizations' 2019 First Half Rated New Issuance Worth About ¥1 Trillion; One Upgrade And One Downgrade

S&P Global Ratings and S&P Global SF Japan Inc. assigned ratings to Japanese securitization transactions worth about ¥1.0266 trillion (see notes 1 and 2) in the first half of calendar 2019. We rated seven securitizations in 2019 (see table 1).

In the course of our surveillance, we raised our rating on one tranche and downgraded one tranche in the first half of 2019. The performance of the transactions we rate continued to be generally stable.

We updated some of our major criteria, including those for sovereign risk, counterparty risk, asset-back securities (ABS) lease transactions, and collateralized loan obligations (CLO), as follows:

  • "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published Jan. 30, 2019
  • "Counterparty Risk Framework: Methodology And Assumptions," published March 8, 2019
  • "Global Equipment ABS Methodology And Assumptions," published May 31, 2019
  • "Global Methodology And Assumptions For CLOs And Corporate CDOs," published June 21, 2019

Table 1

Total Value and Number Of Newly Rated Securitizations In Japan
(Mil. ¥) 1H 2019 2H 2018 1H 2018 2H 2017 1H 2017
RMBS 1,026,600 1,148,200 1,071,600 1,118,500 1,257,600
ABS* 0 87,300 40,575 137,710 0
J-REIT 0 0 3,000 0 12,000
Total 1,026,600 1,235,500 1,115,175 1,256,210 1,269,600
Total number of transactions 7 15 13 16 12
RMBS--Residential mortgage-backed securities. ABS--Asset-backed securities. J-REIT--Japanese REIT. *Includes asset-backed commercial paper.

While Declining, Total Issuance Remained High

Total issuance of rated Japanese securitization transactions came to ¥1.0266 trillion in the first half of 2019, down 7.9% from the same period in 2018. All of the rated securitizations were residential mortgage-backed securities (RMBS), of which total rated issuance declined by 4.2% from a year earlier. We did not rate any repackaged securities backed by collateralized loan obligation (CLO) notes issued in the U.S. in the first half of 2019.

Total issuance of rated Japan Housing Finance Agency (JHF) RMBS dropped 10.1% from a year earlier to ¥918.6 billion. JHF RMBS make up the lion's share of the RMBS issuance market in Japan. Meanwhile, total private sector issuance of rated RMBS transactions was ¥108.0 billion, up 115.1% from a year earlier. In the private sector, we assigned our rating to the ¥108.0 billion PACK1 senior beneficial interests backed by a pool of condominium investment loan receivables in April 2019. It was the first time in about eight years for us to rate a transaction of this kind.

The housing loans underlying Japanese RMBS transactions are mostly fixed rate. The Bank of Japan's (BOJ) negative interest rate policy, introduced in January 2016, is in its fourth year. The policy is likely to continue. Under such an environment, homebuyers appear to expect mortgage loan rates to remain at historic lows for a while. As a result, variable-rate loans continue to account for the bulk of newly issued mortgages. The decline in RMBS issuance was partly due to this limited use of fixed-rate mortgage loans.

We have not observed a last-minute rush to purchase houses ahead of a consumption tax hike to 10% from 8%, planned for October 2019. The amount of mortgage loans extended by JHF also declined from a year earlier. In addition, market interest rates declined globally in June 2019 as business confidence worsened, mainly due to growing U.S.-China trade friction. A couple of RMBS transactions originally scheduled for June 2019 were postponed amid a deteriorating issuance environment. These factors also contributed to sluggish issuance of RMBS transactions.

We expect housing demand before and after the planned consumption tax hike to determine issuance amounts for securitization products. The Japanese government plans to expand the volume of tax relief for housing loans, starting from October 2019, to stimulate home buying. Given this, demand for housing is unlikely to decrease substantially. Therefore, we expect total rated RMBS issuance in the second half of 2019 to be flat or decline a little from a year earlier.

Ratings On Existing Transactions Remain Stable; One Upgrade And One Downgrade

We took two rating actions, one upgrade and one downgrade, on tranches in the first half of 2019. No ratings were affirmed following the resolution of CreditWatch placements (see note 3).

Both of our rating actions were on RMBS transactions and there were no actions on other asset class transactions. We raised our rating on notes issued under an RMBS transaction backed by a pool of condominium investment loan receivables and housing loan receivables. The upgrade reflected the favorable performance of the transaction as seen in factors such as improved credit support. Meanwhile, we lowered the rating on notes issued under the RMBS transaction backed by a pool of apartment construction loans. The downgrade reflected that the amount of credit enhancement on the notes had failed to meet the credit support floor established by our criteria. The number of apartment loans under the transaction has decreased and portfolio diversification has declined because of full prepayments. The rating on the transaction had been placed on CreditWatch with negative implications since November 2018.

In April 2018, Leopalace21 Corp., a major Japan-based apartment builder, announced it had discovered defects in some of the rental apartment buildings it constructed. Leopalace21 has continued checking all of its apartment buildings and conducting repair work. The vacancy rates of the properties the company manages are rising because some residents have been forced to temporarily vacate apartments while they are repaired.

We rate four RMBS transactions backed by a pool of apartment construction loans that were extended to finance the construction costs and miscellaneous expenses of rental apartment buildings that Leopalace21 constructed. In principle,

Leopalace21 has and maintains master lease agreements with the borrowers of the apartment construction loans underlying the related transactions we rate. At this point, no delinquencies or defaults have been triggered by these faulty construction issues. However, we now expect the settlement process of these issues will be more protracted than we originally anticipated. Accordingly, we will continue to monitor any effects these issues have on the performance of the RMBS connected with the Leopalace21 transactions that we rate.

STRONG Rankings On Two Servicers Affirmed

We affirmed our servicer ranking on SMBC Servicer Co. Ltd. in January 2019 and our servicer ranking on Hitachi Capital Servicer Corp. in February 2019, respectively. We ranked both of them STRONG, which is the highest of our five categories. The affirmations reflect our assessments based on our analysis on loan administration and management and organization for the servicers.

We published a report of our comprehensive analytical approach to assessing and assigning servicer evaluations rankings to servicers, trustees, common representatives, and similar service providers globally (see "Analytical Approach: Global Servicer Evaluations Rankings," published Jan. 7, 2019). We consider, among other factors, an organization's operating history and market position, management experience, control environment, staffing and training, systems and technology, key asset administration functions, and compliance with applicable laws, regulations, and industry standards to derive an overall ranking.

J-REITs Likely To Stay Strong And Maintain Improved Financial Standing

We did not assign ratings to any J-REITs in the first half of 2019. Although total issuance in the overall J-REIT market substantially declined year on year, we continued to see several issuances of green bonds. Growing market demand for ways to invest in companies with strengths in environmental, social and governance (ESG) factors is likely to give a boost to the issuance of green bonds for the foreseeable future, in our view.

Meanwhile, J-REIT investment unit (equity share) prices have been solid thanks to lower long-term interest rates. Public offerings of investment units remained brisk with two new listings on the market.

Following a series of new listings, some J-REITs have relatively small asset portfolio and carry undervalued equity units against their net asset value (NAV). In light of this, we think the J-REIT market could see industry restructuring centering on subpar players if the market deteriorates. One of the top players we rate could expand its asset size by merging with or acquiring the assets of, a subpar player. However, this would not necessarily benefit rated J-REIT's business risk profiles if the quality of the acquired assets was low.

We expect the favorable leasing market to support J-REITs' steady performance over the next 12 months. However, the acquisition market is overheating and prices could have peaked, in our view. In the office leasing market, rent levels may stop rising if the supply-demand balance loosens. There are signs of a slowdown in corporate earnings, particularly among manufacturers. In addition, we expect major upticks in central Tokyo office building supply in 2020 and 2023. Meanwhile, trading volume in the acquisition market has decreased amid rising property prices. J-REITs have become selective buyers, and are likely to somewhat slow the pace of their acquisitions, in our view. J-REITs have been shuffling their portfolios. Consequently, we believe that the quality of J-REITs' portfolios will continue to improve moderately. Nevertheless, we expect rated J-REITs' profitability to remain flat because of a decline in expected yields on acquisitions.

Over the past few years, rated J-REITs have moderately improved their leverage through flexible funding, by raising capital or selling properties for lease, at the time of property acquisitions. With respect to retail J-REITs, we think cost burdens for investment in store renovations will likely increase slightly. Even so, we expect rated J-REITs to generally maintain their current improved financial standings over the next 12 months, supported by cash flow generation from stable rent revenues.

Notes

1. In this report, figures include rating actions by S&P Global Ratings and S&P Global SF Japan Inc. (SPSF). SPSF is a registered credit rating agency under Japan's Financial Instruments and Exchange Act (FIEA) but is not registered as a Nationally Recognized Statistical Rating Organization (NRSRO) under U.S. Laws. Therefore the credit ratings assigned by SPSF are Registered Credit Ratings under FIEA but are not Credit Ratings issued by an NRSRO under U.S. laws.

2. The transactions include confidential ratings, credit assessments, and J-REITs but exclude credit derivative products that lack issuances of bonds or trust certificates.

3. Rating affirmations in this report refer to cases where we removed the ratings from CreditWatch without changing the ratings. They do not include cases where we simply maintained the rating on a tranche such as affirmations as a result of a regular periodic review, nor do they include affirmations on ratings on some tranches of a transaction when the ratings on the other tranches were changed.

This report does not constitute a rating action.

Primary Credit Analyst:Yuji Hashimoto, Tokyo (81) 3-4550-8275;
yuji.hashimoto@spglobal.com
Secondary Contacts:Hiroshi Sonoda, Tokyo (81) 3-4550-8474;
hiroshi.sonoda@spglobal.com
Toshiaki Shimizu, Tokyo (81) 3-4550-8302;
toshiaki.shimizu@spglobal.com
Roko Izawa, Tokyo (81) 3-4550-8674;
roko.izawa@spglobal.com

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