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Japan's 2022 Securitization Market: ABS No Longer Flexing


Credit FAQ: Sharing Is Caring: U.K. Shared-Ownership RMBS Explained


Weekly European CLO Update


RFC Process Summary: Analyzing Letter Of Credit And Bank Liquidity Supported Transactions In Primary And Secondary Markets: Methodology And Assumptions


General Criteria: Methodology For Analyzing Letter Of Credit And Bank Liquidity-Supported Transactions

Japan's 2022 Securitization Market: ABS No Longer Flexing

People cannot buy cars and fixed-rate mortgages are out of favor. That has shrunk Japan's securitization market.

Total new issuance of Japanese securitization transactions was worth about ¥5.9 trillion in 2022, down about 13% from the previous year (see notes 1 and 2). Residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) continued to drive Japan's securitization market, occupying a large proportion of total issuance.

The decline in total issuance, in our view, is because of a substantial 22% reduction in ABS issuance. We forecast total new issuance in 2023 to be level with that of 2022.

During surveillance of Japanese securitization transactions that we rate, we did not raise or lower any ratings in 2022.

We published or amended and republished the following rating criteria to analyze RMBS, consumer ABS, and auto ABS transactions during 2022.

These criteria ensure the application of a consistent analytical framework globally. They also enhance the transparency of our rating framework.

Chart 1


Semiconductor Sorrow; Rattled By Rates

ABS and RMBS sectors together dominate Japan's securitization market. We mainly attribute the 13% decline in securitization issuance in Japan to a drop in new issuance in the ABS sector. This sector, the largest in the domestic securitization market, was hit by new vehicle sales plummeting to a 45-year low. This was caused, in part, by an ongoing semiconductor shortage. Issuance of subordinated loan securitization transactions by insurers also fell in 2022.

The total amount of securitization transactions we rate declined about 14% to ¥1,551.6 billion in 2022. Interest rates on fixed-rate housing loans edged up over the last 12 months. Rates on floating-rate loans remained low. Borrowers are therefore increasingly signing up for floating-rate loans as the spread between short- and long-term rates widens.

RMBS transactions backed by fixed-rate housing loans account for over 90% of securitization deals we rate. Thus, the decline in the total amount of securitization deals we rate is mainly due to a drop in the number of fixed rate-based borrowers. Total issuance of rated RMBS issued by Japan Housing Finance Agency (JHF), the largest originator in Japan's securitization market, also fell about 20% to ¥1,301.5 billion in 2022. JHF notes are backed by fixed-rate mortgage loans.

We expect a similar amount of issuance of securitization transactions in 2023 to 2022. Recovery of new vehicle sales will likely contribute to bolstering ABS issuance. In the housing loan sector, both fixed-rate loan amounts and RMBS issuance amounts will continue to fall due to a widening gap between short- and long-term rates. However, a rise in short-term rates would narrow the gap with long-term ones, and could lead to an increase in RMBS issuance if more people sign on for fixed-rate loans.

Existing Ratings Remain Unchanged

In our surveillance during 2022, the only rating actions we took on securitizations in Japan were on five tranches of a transaction we had placed on CreditWatch with negative implications. We removed these tranches from CreditWatch and affirmed our ratings on them. We had placed these tranches on CreditWatch to reflect the increased possibility of failure to pay interest, after the publication of Japanese yen LIBOR rates was discontinued. We resolved the placement on confirming payments would be made referencing synthetic Japanese yen LIBOR.

Performance of existing transactions remained stable despite significant changes in the macroeconomic environment. For example, inflation emerged, and the Japanese yen depreciated. Given the stability, we did not take any rating actions specifically due to transaction performance.

Publication of synthetic Japanese yen LIBOR was discontinued at the end of 2022. All but one transaction we rate that reference synthetic Japanese yen LIBOR have successfully switched to alternative reference rates. The next interest determination date for this transaction is scheduled for June 2023. In addition, publication of U.S.-dollar LIBOR will cease at the end of June 2023. Interest payments on underlying U.S. dollar-denominated notes in two repackaged transactions we rate refer to U.S.-dollar LIBOR. We plan to confirm the impact on the ratings on each transaction as soon as their transitions to replacement rates are completed.

On Dec. 16, 2022, we republished an update to our criteria "Global Methodology And Assumptions; Assessing Pools Of Residential Loans," published Jan. 25, 2019. We updated the criteria to include Japan in its scope. The effective date of application of the criteria to Japanese transactions was Jan. 6, 2023. Application of the criteria did not lead us to take actions on any of our ratings on existing RMBS transactions.

Servicers Deal With Volume Declines

As of the end of 2022, we had rankings on two residential mortgage loan servicers and one commercial mortgage loan servicer. We took no actions on our evaluations of these servicers in 2022. Our stable ranking outlooks on the servicers remain unchanged.

Servicing loan receivables that were entrusted by JHF are major businesses for the two residential mortgage loan servicers. Loan receivables entrusted by JHF have continued to decline in recent years. Meanwhile, these residential mortgage servicers are working to diversify earnings. They are working to strengthen collection from unsecured loans and servicing of loans for private-sector financial institutions. Meanwhile, the commercial mortgage servicer is seeking to increase new business, as its servicing volume remains flat.

As a part of our work monitoring of servicer evaluations, we have regularly conducted hearings on servicers' operations amid the pandemic in the past few years. The three servicers we rank have continued conducting business without major problems.

According to the latest survey by the Ministry of Justice, the number of servicers had declined to 76 as of the end of 2021, from a peak of 102 in 2008. The outstanding receivables they handle decreased about 62% to ¥10.8 trillion, from a peak of ¥28.6 trillion. While the outstanding amount of assets under management has been on a long-term downward trend, the number of such assets started declining in 2020 with the spread of the COVID-19. Nevertheless, the number of assets did not decrease as much as the amount--about 21% to 11.01 million in 2022 from 13.98 million in 2008. This indicates the amount per receivable is declining.

The servicers' efforts to streamline servicing operations, maintain quality and diversify earnings in the contracting market is key to our analysis.

J-REITs' Bond Issuance Will Likely Remain Low

We did not assign ratings to any J-REIT bonds in 2022. In the overall J-REIT market in Japan, volume and the number of bond issuances fell substantially below those of the past few years. The same goes for the amount of equity offerings. New property acquisitions, both in number and value, hit the lowest level since 2013, mainly due to a decline in office and commercial property segments. We expect J-REITs that emphasize steady distribution payments and financial health to remain less aggressive about property purchases. This is because they are concerned about pressure on the real estate market, brought about by issues such as economic downturn and policy shifts away from monetary easing, amid persistently higher property prices and lower cap rates. Thus, J-REITs will highly likely remain selective on property acquisitions, making a limited number in the next one to two years. Nevertheless, stable funding suggests issuances of green bonds, as well as issuances intended for refinancing and extending maturity dates, will likely continue to support the J-REIT bond issuance market somewhat.

In our view, J-REITs will continue to face pressure on rent and occupancy rates in office properties in 2023. According to data from Miki Shoji Co. Ltd., the average vacancy rate of office buildings in Tokyo's business districts bottomed at 1.49% in February 2020 and rose substantially through the pandemic. The rate has been stable between 6% and 7% since the latter half of 2021. Average rents are also trending downward in tandem with the rise in vacancy rates. We forecast vacancy rates of office buildings in central Tokyo to deteriorate steadily from 6.5% at the end of 2022 to 7.0%-7.5% toward the end of 2023, based on the following negative factors.

  • A moderate decline in demand as companies revise their office strategies and telecommuting and shared offices become widely accepted; and
  • Scheduled new large-scale supply.

Although ample demand remains for high-grade properties in favorable locations, we expect the office building market to remain somewhat weak, particularly for less competitive properties. Meanwhile, demand for residential properties will likely remain solid. We consider retail facilities to have recovered from the pandemic. We also expect to see steady improvement in hotels as tourism recovers.

We believe rated J-REITs will continue performing solidly and maintain their current favorable financial standing in the coming 12 months. We expect their quality portfolios to help them cope with a somewhat weaker leasing market, particularly for offices. J-REITs we rate all have maintained favorable EBITDA interest coverage ratios, thanks to strong ties with financial institutions and super-low domestic interest rates. We also consider the potential risk of rising interest rates to be limited, as fixed-rate debt accounts for a large portion of their total debt, which has a long average remaining life.


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:Hiroshi Sonoda, Tokyo (81) 3-4550-8474;
Secondary Contacts:Toshiaki Shimizu, Tokyo + 81 3 4550 8302;
Yuji Hashimoto, Tokyo + 81 3 4550 8275;

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