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

Capital Markets View - October 2021


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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


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.


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;
Secondary Contacts:Hiroshi Sonoda, Tokyo (81) 3-4550-8474;
Toshiaki Shimizu, Tokyo + 81 3 4550 8302;
Ryohei Yoshida, Tokyo + 81 3 4550 8660;

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