Standard & Poor's recently affirmed its existing AAA' ratings on all Japanese asset-backed, mortgage-backed, and commercial real estate-backed issues (77 public ratings in total) following the downgrade of Japan's sovereign local and foreign currency ratings to AA+' with a stable outlook on Feb. 22, 2001 (see note below). The ratings affirmations are based primarily on the robust credit enhancement levels imbedded in these highly structured financings. Such enhancement levels, which serve as a first-loss equity cushion protecting investors from defaulted receivables in the underlying asset pools, are deemed sufficient to allow for full and timely debt repayment, even under a scenario where the government is unable or unwilling to meet its own debt obligations. The securitization market's strong performance in Japan over its eight-year history provides additional evidence of these securities' inherent credit quality. In total, risks stemming from the worsening economic conditions in Japan are fully incorporated in the stress assumptions underpinning Standard & Poor's ratings on domestic and cross-border structured transactions. Key elements of economic stresses that may lead to a deterioration in pool performance, financial system disruption, or capital controls have also been factored into Standard & Poor's analysis and ratings of these issues.

As is the case with rating traditional issuers of debt, rating structured transactions above the sovereign implies that the structured obligations - asset-backed, mortgage-backed or commercial real estate-backed securities - would continue to perform in an economic scenario in which the government itself has defaulted. For most structured issues, the primary risk deriving from a sovereign stress scenario is that the same macroeconomic factors that underlie a sovereign default are also likely to lead to deteriorating credit performance in any securitized asset pool whose underlying obligors are domiciled in that country. Because the performance of the underlying assets is assumed to weaken because of a more difficult economic environment, credit enhancement levels might have to be raised to offset these higher risks and justify a given rating level.

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