Honda Finance, the financing arm of Honda Motor Co., came to the public securitization market for the first time in mid-June with a 32.6 billion ($311 million) autoloan transaction, which lead manager Merrill Lynch said will set a new benchmark in the Japanese asset-backed market.
The one-tranche deal, which was rated triple-A by Moody's Investors Service and Standard & Poor's, was certainly tightly priced at 15 basis points over Libor for paper with a final maturity of 2005 and an expected average life of around 1.6 years.
As is increasingly common in Japan, where investors have become much more sophisticated in the last year, the deal is structured as pass-through floating rate notes, a structure which handles unpredictable prepayments efficiently without incurring significant negative carry costs.
The swap to convert the cashflow from the fixed rate autoloans into the floating rate notes came from Merrill Lynch Derivative Products.
Like nearly all cross-border Japanese securitizations, the transaction uses two Cayman Island incorporated special purpose companies, one with a branch in Japan, in order to allow the deal to be sold internationally without incurring prohibitive taxes. An SPC called Woodpecker Funding Corp. holds senior and subordinated trust certificates backed by the autoloans, worth 35 billion, and issues 32.6 billion of floating rate bonds. Those bonds secure the notes issued by JHFC Auto Loans Funding Corp. to investors.
The vast majority of the paper was placed in Japan, with a small amount sold offshore.
Credit enhancement comes from the overcollateralization (of 6.86% of the total pool) and from the subordinated trust certificate of 6.37%. The portfolio is made up 23,677 loans made to finance the purchase of new cars.
According to Merrill's Ben Bystrom this level of credit enhancement is significantly lower than has been achieved by Japanese autoloan deals in the past. "That's a result of two things," he said. "One is the strength of Honda Finance - they are a strong servicer of good credit quality - and as a result the level of co-mingling risk in this deal is low. The other is that the autoloans themselves make up a good solid portfolio and have performed well."
Analysts added that the strength of Honda Finance and the parent company is also significant for the development of Japan's autoloan-backed securitization market, which has been dominated by second-tier finance companies. Such firms have turned to securitization as the best way for weaker companies to raise finance at reasonable rates.
"This deal can act as a benchmark," Bystrom added. "We haven't seen any deals from such a strong issuer, with a name that is recognized globally, plus it's a pass-through and the credit enhancement is much closer to U.S. levels."
In other transactions, Mycal Corp. - a retailer struggling under a significant debt burden - returned to the CMBS market with a deal backed by sale and lease back agreements on 10 of its 309 Vivre and Saty-branded stores.
The BNP Paribas-arranged deal totaled 49.8 billion and came via an SPC called Millenium Shopping Corp. The 39.8 billion senior tranche was rated Aaa by Moody's, has a 2005 expected maturity and a coupon of 1.56%. The 10 billion junior piece has ratings of Baa2, a 2007 expected maturity and a coupon of 3.11%.
Shiro Uehara on BNP Paribas' financing desk in Tokyo said that the deal had not yet closed, but that orders for the entire amount had been penciled in. He expressed satisfaction with the pricing and the distribution.
This transaction is the company's second dip into the CMBS market, after a transaction - also arranged by the French bank - in October last year (ASRI 10/4/2000 p.8). It is likely to be followed by more as the originator attempts to replace other liabilities with cheaper asset-backed funding.
