Until now, Sumitomo Marine & Fire Insurance Co. has not been a frantic buyer of domestic asset backed issues. The firm, which is the fourth largest property and casualty insurer in Japan, is far more active in guaranteeing asset-backed issues than investing in them, said Kazuo Wakayama, manager in the firm's investment planning department in Tokyo.
Japan's low interest rate environment, on top of thin spreads and low liquidity in the current domestic ABS market, mean that such issues not very attractive to Sumitomo Marine, said Wakayama. "We are not aggressively looking for ABS, mainly because it is very hard to find ABS with sufficient spreads that can mitigate the risk of low liquidity," he said.
Also, the firm is often put off by the low level of disclosure typically given by domestic issuers. "We feel a bit uneasy investing in some issues based on the very limited information in the offering circular," he explained.
In fact, Sumitomo Marine only receives enough of information about a deal when they act as a guarantor. "When we request to guarantee a transaction, then we get much more information. Then we know too much about it," he said.
Given Comfort By JLC
As a financial guarantor, Sumitomo Marine was one of the earliest and most active players in the domestic asset-backed market, said Wakayama. It wrapped the first securitization by a Japanese originator, a Euromarket issue from the former Japan Leasing Corp. JLC was the country's biggest ABS issuer until it collapsed in 1998.
As backup servicing continued without a hitch and no serious legal problems ensued, Sumitomo Marine did not have to make any payments on the insurance policy. That greatly raised the firm's comfort level with domestic securitization structures, noted Wakayama.
Sumitomo Marine's asset backed portfolio is currently under 20 billion ($191 million), a relatively small figure compared to other Japanese insurers who are the biggest buyers of domestic ABS. That figure may grow to 60 billion by the end of Japan's fiscal year-end next March, but that target is flexible. More important is that the spread on such securities is high enough to compensate for their lack of liquidity, said Wakayama.
Passing On Pass-Throughs
The firm will only invest in unwrapped, primarily investment-grade issues with maturities of three to five years. However, ratings requirements are flexible, as the firm is highly skilled in ABS credit analysis, said Wakayama.
And though Sumitomo Marine has purchased pass-through securities for their relatively higher spreads, its back office, like most domestic institutional investors, is not equipped to book a large number of pass-through issues, limiting its purchases mostly to fixed-rate bullets.
"It is very unlikely that we'll buy a substantial amount of pass-throughs, since they create a lot of manual work in the back office. Maybe a small number of deals is OK, but investing in a large volume or many transactions of this kind is not feasible at the moment." A minimum spread of 20-30 basis points for triple-A rated securities or their equivalent is preferred, though such issues are rare, he added.
Dominant asset classes in its domestic ABS portfolio are auto loans, equipment leases and trade receivables. "Consumer credits and auto loans are so popular they are getting commoditized, so the pricing is becoming tighter," he commented.
Sensitive To Reputation Risk
Issues backed by unsecured consumer loans originated by some non-bank finance companies provide relatively higher spread because of the "reputation risk" attached to some firms in the sector, which allegedly use aggressive collection methods.
However, Sumitomo Marine is careful about buying from such issuers. "There is a lot of social criticism of these consumer finance companies, and we are sensitive to this. There are good and bad companies, and we keep a list of them and their business practices," he commented.
The firm exercises the same kind of discretion when approached by an issuer to wrap an issue. "We receive many requests to guarantee ABS, but we will only consider it for specific originators," he added.
But Keen On CMBS
One asset class that that Sumitomo Marine is keenly interested in both as an investor and guarantor is commercial mortgages. Demand for commercial mortgage-backed issues is currently very strong among domestic investors, since they typically come with higher yields.
"Before, some CMBS issues provided a spread of 100 basis points, but this has gone down. It is very easy for issuers to sell CMBS right now," he commented.
So far, the firm has originated one non-recourse loan that it plans to securitize, and is now considering investing in two more commercial property deals, both private. It is also in the process of providing a guarantee on its first CMBS, which is backed by a large pool of small commercial mortgages, he added.
Going forward, the firm plans to draw upon its tie-up with Sumitomo Life Insurance and Sumitomo Trust and Banking to originate and market CMBS deals originated by the Sumitomo group.
Under the arrangement announced in April, each party will do what it does best: Sumitomo Life will bring asset and property management capabilities and a huge real estate portfolio, Sumitomo Trust and Banking will provide trustee and real estate broker services, and Sumitomo Marine will guarantee the issues to leverage them, he concluded.