Collateralized bond obligations (CBOs) are relatively new in Japan but are quickly gaining acceptance in the market, as shown by two CBOs being readied for launch next month.

Both CBOs are backed by a pool of Eurobonds newly issued by a diverse group of Japanese companies, and will issue three-year notes to investors in Japan and Europe. The senior tranches of each issue have been rated triple-A by Japan Rating & Investment Information, although some of the underlying corporates in each transaction are unrated. Pricing for both CBOs is set for mid-June.

Nomura Securities is arranging Ensemble II Ltd., which will issue four tranches of notes totaling 106 billion ($883.3 million) on behalf of 27 borrowers from 15 different industries. Eleven of those companies are unrated, while the rest are rated between double A-minus to triple-B by Japan R&I. The launch follows Nomura's first CBO issued by Ensemble Ltd., which raised 91.5 billion for 21 companies in February (ASRI, 2/8/99, p.1).

Not to be outdone, Sakura Finance International has arranged its first-ever CBO in the name of All Aboard Funding Ltd., which will issue 22 billion in senior debt, 5 billion in mezzanine debt, and 8 billion in subordinated debt. The senior tranche is rated triple-A and the mezzanine tranche is rated single-A by Japan R&I. Proceeds will benefit a group of 10 borrowers, some of which are unrated, according to Teruhisa Fujii, assistant general manager of structured finance at the firm.

Japanese companies are having an easier time obtaining bank funding, thanks to a March infusion of public money in the banking sector. Yet for many small to mid-sized companies with relatively light funding needs, CBOs offer a cheaper alternative than issuing straight bonds, especially if the companies are unrated, said Fujii. "The CBOs issued so far came out late last year, when Japan had a severe credit crunch," he added. "Some believed that it would be a seasonal product, but now we're seeing that it is becoming quite common."

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