articles Ratings /ratings/en/research/articles/210803-japan-s-securitizations-remained-stable-in-2021-s-first-half-despite-covid-19-12063342 content esgSubNav
In This List
COMMENTS

Japan's Securitizations Remained Stable In 2021's First Half, Despite COVID-19

Capital Markets View - October 2021

COMMENTS

Weekly European CLO Update

COMMENTS

SF Credit Brief: CLO Insights 2021 U.S. BSL Index: Credit Metrics Continue To Improve As Upgrades Begin

FULL

Servicer Evaluation: Selene Finance L.P.


Japan's Securitizations Remained Stable In 2021's First Half, Despite COVID-19

As Japan learns to live with COVID-19, securitizations we rate continue to perform stably.

In the first half of calendar 2021, total new issuance in Japan's securitization market came to about ¥3.4 trillion, up about 4% from the same period of the previous year. Residential mortgage-backed securities (RMBS)--including those Japan Housing Finance Agency (JHF) issued--and asset-backed securities (ABS) accounted for more than 90% of the issuance market in the first half of the year.

During surveillance of securitization transactions we rate in Japan, we did not take any rating actions in the first half of 2021. Under the second and third states of emergency in the first half of 2021, restrictions on economic activity by the government were mild, compared with those imposed under the first state of emergency in 2020. Consequently, the impact on the performance of securitization transactions was limited, in our view.

We published reports that discussed environmental, social, and governance (ESG) credit factors related to securitizations by asset class. The reports below also had Japanese versions published. In these reports, we provide ESG benchmarks by asset class, and in the presale reports of new transactions, we have compared ESG benchmarks and transactions' potential exposures to ESG credit factors and disclosed the results.

Furthermore, in response to rising interest among market participants in the discontinuation of announcements of the Japanese yen London Interbank Offered Rate (LIBOR), we published the following commentaries.

We disclosed in July 2021 the stressed interest rates that we assume in our analysis of securitization cash flows, including Tokyo Term Risk Free Rate (TORF) and Tokyo Overnight Average Rate (TONA), replacement rates of LIBOR by expanding the scope of criteria (see "Methodology To Derive Stressed Interest Rates In Structured Finance," first published Oct. 18, 2019).

Chart 1

image

Issuance Marks A Marginal Increase

In the first half of calendar 2021, total issuance of rated Japanese securitization transactions stood at about ¥3.4 trillion. This was 4% higher than during the same period of the previous year. The increase, in our view, was in part the effect of a rebound from the pandemic triggered decrease year-on-year between 2019 and 2020. The major drivers of the Japan's securitization market are RMBS transactions, mainly those of JHF, and ABS, in our view.

In the RMBS segment, we assigned ratings to monthly RMBS and series T notes issued by JHF, and transactions backed by housing loan receivables originated by Sumitomo Mitsui Banking Corp. (SMBC): the ¥46.8 billion SMBC Residential Mortgage Trust Certificates No. 45 and the ¥7.4 billion SMBC 45 RMBS ABL (asset-backed loans). Total issuance of rated RMBS issued by JHF, the largest originator in Japan's securitization market, decreased 12.1% from the same period of the previous year to ¥895.1 billion. This was mainly because new housing loans, amid pandemic-induced weak demand for house purchases, plateaued. In the ABS segment, we assigned a rating to the ¥60 billion Driver Japan ten. The collateral comprises Japanese auto loan receivables that Volkswagen Financial Services Japan Ltd. originated.

In the first half of 2021, the second and third states of emergency influenced economic activity. A fourth declaration of a state of emergency was issued in July. This shows that regarding COVID-19, the situation remains fluid. Meanwhile, we expect vaccination progress to help bring about a moderate economic recovery in the second half of 2021. We also believe the volume of newly originated housing loans is highly likely to start to increase in the second half of 2021 as housing starts have been increasing since March 2021. We expect the issuance amount in 2021 for the full year to increase slightly from the previous year.

States Of Emergency Had Little Impact On Surveillance Transactions

We did not take any rating actions on existing transactions we rate in the first half of 2021.

We believe the impact on housing loans of states of emergency in the first half of 2021 was limited. These states of emergency only imposed mild restrictions on economic activity, compared with those imposed during the one declared in 2020.

After the 2020 state of emergency, we saw temporary increases in replacement and withdrawal ratios of JHF's residential mortgage-secured pass-through notes, including those of Government Housing Loan Corp. (GHLC), and the default rate for RMBS issued by private sector entities. However, they largely recovered and then remained stable in the first half of 2021. Moreover, delinquency rates, a leading indicator of default rates, have not changed significantly.

Based on the above, we view the likelihood of default rates rising sharply in the next few months as low. However, if economic recovery takes longer than we expect due to a significant increase in cases of COVID-19 and a delay in vaccination, underlying assets could come under a great deal of stress, in our view.

In addition, the publication of the Japanese yen LIBOR will be permanently discontinued at the end of 2021. Discussion on transition to replacement rates for securitizations that reference LIBOR is ongoing. Transaction parties have told us replacement rates have been decided for multiple securitizations that reference LIBOR. However, for the majority of securitizations, transition processes are under review. We expect decisions on specific transition processes, including amendments of transaction documents and notices to obligors, will accelerate in the second half of 2021. We plan to confirm the impact on our ratings on existing transactions when we receive related transition information.

Servicers Carry On Under The Pandemic

We affirmed our servicer ranking on Capital Servicing Co. Ltd. in the first half of 2021.

We continue as part of our monitoring to discuss with the servicers how they manage their business under the COVID-19 pandemic. Although successive states of emergency have made for unusual situations, the three servicers we rank have continued business without major problems, in our view.

For their servicing related business, there have been cases where the three servicers we rank had employees work at the office during the states of emergency. This is mainly because they need to prevent leaks of the highly classified personal information they work with.

On the other hand, for their administration related business that does not involve engagement with customers, in response to government requests, these servicers worked to reduce the percentage of staff in the office. They did this by having staff work from home, in shifts, with staggered working hours, or with reduced business volume.

In addition, in response to the rise of market participants' interest in ESG in general, we published a Japanese version of our report about the ESG factors in servicer evaluation. The English, "Servicer Evaluation Spotlight Report™: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings," was published Nov. 16, 2020.

J-REIT Office Property Market Is likely To Continue To Deteriorate

We did not assign ratings to any J-REIT bonds in the first half of 2021. The overall J-REIT market remained steady in terms of issuance amounts and number of issuances. We expect J-REITs to continue to restrain property purchases, considering that correction in the real estate trading market are slower than those in the real estate leasing market. Nevertheless, on the back of the stable financial market, issuances of green bonds, as well as issuances intended for refinancing and extending maturity dates are likely to continue to support the J-REIT bond issuance market, in our view. Meanwhile, even though J-REIT investment unit prices continue to recover, we expect public offerings of investment units will continue to be soft in the second half of 2021 given the said market conditions. There was only one new listing in the first half of the year. This listing was the first in 18 months, and the first since the pandemic started.

The persistent impact of the pandemic in major cities such as Tokyo is likely to continue to weigh on rent levels from and the occupancy rates of some segments in the second half of 2021, in our view. We specifically expect pressure on office properties, retail facilities located in central business and shopping districts, and hotels. Nevertheless, we believe rated J-REITs are likely to continue performing solidly and maintain improved financial standing in the coming 12 months. We expect their quality portfolios to help them cope with deterioration of the overall leasing market.

Notes

1. S&P Global Ratings calculated based on the public information from rating agencies. Numbers are subject to change with additional information.

2. 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.

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
Ryohei Yoshida, Tokyo + 81 3 4550 8660;
ryohei.yoshida@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back