The Bank of Japan's Monetary Policy Meeting confirmed on June 11 the details which will allow it to purchase ABS and ABCP. This is a temporary measure: the Bank of Japan (BOJ) intends to start purchasing ABS from the end of July 2003 through June 2006.
The ultimate goal of these new measures, however, is not ABS, but the small and medium-sized business sector (SMEs), which has been under pressure for some time. Although many measures have been taken to date, both by the Ministry of Economy, Trade and Industry (METI) and the government-owned financial institutions to help provide financing to this sector, these businesses are still finding the funding environment extremely difficult, and loans by commercial banks to small businesses continue to decrease.
Market participants say that immediately after Mr. Fukui was appointed governor of the BOJ
in late March, he began talking about the central bank playing a role in helping out the small business sector.
As the above measures show, one way he sought to achieve this was to support the ABS sector, and indirectly the SME sector.
The eligibility criteria set out by the BOJ with regards to the assets purchased, includes some of the following: the deals must be domestic public issues; synthetic credit-linked notes will be accepted, provided they are publicly offered; the purchased amount of a specific tranche will be capped at 50% of the total issue amount; and the underlying portfolio, on a face amount basis, must be comprised of at least 50% of assets related to SMEs (defined as companies with less than 1 billion [US$8.4 million] in capital).
Eligible underlying assets will not be limited to trade receivables and loans, but will include any type of asset that BOJ deems appropriate from the perspective of providing funds to SMEs. This will include transactions such as equipment-lease ABS originated by non-banks. Tranches with ratings as low as double-B will be considered; the notes must be rated by multiple rating agencies; notes must have a maturity of less than 3 years.
What will the impact of this measure be?
As mentioned above, the aim of this measure is to extend funds to the SME sector. However, the overall impact, in terms of what the BOJ is trying to achieve, could ultimately be low as, for instance, only 12% of the deals Merrill Lynch tracked in 2002 were public. Merrill Lynch also points out that they have counted only seven public deals in 2003, of which only one, Azozora Bank's CLO, would qualify under the eligibility criteria set out by
However, Merrill Lynch also says in its Japan ABS/MBS Bi-weekly (6/16/03) that this scheme will be beneficial to the ABS market. They added that it supports the development of the market, and limits the distortion of the market pricing mechanism. "For the ABS market, the guidelines are positive, because currently there is very little secondary trading activity in the Japanese market, and these measures could build some liquidity," says Chinatsu Hani, vice president at Merrill Lynch.
"Further, the Bank of Japan has been very careful in its approach and by limiting its purchase to 50% of a tranche, has ensured that it does not cause any price distortions in the market, while also trying to bring some transparency to the market by incorporating in the eligibility criteria, a minimum of at least two ratings," she adds.
The issue of determining fair value of ABS is addressed by restricting the eligible ABS universe to public notes, and by capping the purchase amount to 50% of the size of each tranche. Merrill Lynch adds that these moves will make the market more sensitive to pricing, and that some differentiation may occur in the pricing levels of BOJ eligible and non-eligible transactions. "Currently, pricing is primarily based on negotiation, and therefore not necessarily driven by the market. Investors could become more market-oriented as a result of the purchase scheme by the BOJ," explains Merrill's Hani.
Yukio Egawa, director in the global securitization research group of Deutsche Bank, said that it was possible that in the triple-B and double-B rated classes, there could be some effects on pricing because the BOJ acts as an "additional" buyer. However, he added that he would not expect any such influence on ABCP and term-securitizations rated in the single-A, double-A and triple-A ranges because there is ample investor demand.
Many also agree that the above measure could encourage the issuance of more public deals. "To date, the majority of Japanese term-securitisations have been issued in the form of bonds sold through private placements and in the form of trust beneficiary interests rather than bonds/notes. Under these new BOJ requirements, more issuers and underwriters will opt for domestic public issuance rather than private placements, euroyen issues or trust certificate, " says Yukio Egawa at Deutsche Bank.
"If this occurs, this will be a welcome trend in the securitization market by bringing increased transparency. Unlike private placements, in case of public offerings, offering documentation is in the public domain and issue prices must be filed and publicly announced," added Egawa. He also believes that this would not bring increased additional costs to the issuers.
Another clear benefit is the BOJ's purchase of the double-B tranches. Although the impact on synthetics will possibly be minor, these too will have to qualify as public issues. "The market's capacity to absorb double-B paper is limited at present, and the move by the BOJ to purchase such products should help promote issuance and thereby invigorate the securitization market as a whole, " said Egawa at Deutsche Bank in a research piece, dated June 12.
But in terms of the impact on the SME market - these are uncertain - concludes Merrill Lynch, because the underlying bank assets must be classified as "normal" as under the FSA's examination manual, while the companies that are not normal may be the ones in actual need of funding. Merrill Lynch added that the banks that obtain capital relief from synthetic transactions are not required to redirect the lending to SMEs. Merrill Lynch, therefore, believes that the policy should have a positive impact on the long-term development of the Japanese ABS market, but the effectiveness, as a monetary policy, may need to be addressed on a separate scale.
However, the outcome could be more positive. "If BOJ purchases mainly double-B rated junior-mezzanine tranches in cashflow CLOs and synthetic CDOs, it will stimulate issuance of balance-sheet CDOs (both cash and synthetic) from commercial banks. This, in turn, will help reduce asset size or risk assets (for capital adequacy ratio calculation purposes) for commercial banks. If commercial banks, by achieving capital relief, become more aggressive in lending to these businesses, the Bank of Japan's intention will be achieved," explained Egawa. He adds that this could be a long process.
"If, on the other hand, the Bank of Japan mainly purchases ABCP and term-securitizations rated triple-B or higher, then it probably won't have any impact," said Egawa.