Morgan Stanley Dean Witter's residential mortgage deal for Mitsubishi Trust & Banking closed recently, in what is only the third public RMBS transaction from Japan (ASRI 5/8/2000 p.1).
The deal, which market pros in Tokyo said was well-received by investors, was worth 33 billion ($309 million) and marked a significant advance in an RMBS market that has not grown at the rate many hoped due to legal and technical difficulties.
The transaction is called MTBC Housing Loan Corp. and was split into four tranches, with a 29.5 billion triple-A tranche, a 500 million double-A tranche, a 1 billion single-A tranche and a triple-B piece worth 2 billion. The ratings came from Standard & Poor's, Moody's Investors Service and Japan Credit Rating.
Unusually for Japan, the Samurai deal comprises paper more normally associated with the more developed western markets: fixed rate pass-through bonds, with bullet repayments and a monthly payment structure. The final maturity is 2035, though with a call option in 2016, making it unusually long-dated for Japan, where very few bonds - even government debt - approach such maturities.
Even so, the coupons of 1.64%, 2.94%, 3.09% and 3.58% for the four tranches were described as having "excellent value" by one Japanese investor, given the current low interest rate environment, which makes large amounts of pre-payments unlikely, and the quality of the 2,537 mortgages that make up the portfolio.
Morgan Stanley acknowledged that selling a deal structured in this way is not as easy as selling paper with more certain amortization and less frequent payment dates, but nonetheless was encouraged by the increasing sophistication of Japanese investors, who have recently made great strides in updating their systems to handle pass-throughs and monthly pays. Either way, the U.S. investment bank argued that the structure was necessary to deal with the complexity of Japanese mortgages while avoiding leaving interest rate risk in the deal.
"We worked with the rating agencies to statistically map out a whole variety of stressed cashflows and see what on a worst case scenario the portfolio could support on a straight coupon basis," said Douglas Kennedy, an executive director in Morgan Stanley's securitized products group in Tokyo. "And then we set the coupons according to that, rather than have the client pay for the hedging that would otherwise be needed. It is a better deal for the client and with the pick-up it was obviously interesting to investors."
The success of that strategy seems to have been borne out by the fact that all of the tranches were oversubscribed with most clamor for the lower-rated pieces. The paper was placed with the 20 investors including large city banks, regional banks and insurance firms.
Morgan Stanley also believes that it has cracked another problem that has dogged the Japanese RMBS market from its inception: the difficulty of transferring the rights to the collateral on the underlying property to the SPV along with the mortgage repayments. The problem arises because mortgages leant by most banks in Japan are guaranteed by an affiliated company and this makes getting an undisputed first lien on the properties tricky.
Bear Stearns argued that they had solved this problem when they issued the first successful RMBS for Sanwa Bank in 1998. They are still adamant that their solution worked, but not everyone - notably S&P - was convinced. It is difficult for outsiders to comment on this because their exact solution is considered proprietary information and is kept closely guarded.
The same problem applies to Morgan Stanley's latest attempt, as they too are playing their cards close to their chest. "Suffice to say that we have opinions from Japanese counsel, which combined with the triple-A ratings, gives us the confidence that we have moved beyond what has been achieved before," Kennedy said.
Kennedy added that Morgan Stanley and Mitsubishi will also make efforts to provide the kind of post-close deal support more common in Western securitization markets, with reports on the portfolio's performance, paydown history, etc. being provided on Bloomberg, plus a commitment to providing market making in the bonds.
Market watchers added that the success of the deal makes it likely that Mitsubishi, the largest of Japan's seven major trust banks, will come back to the market with more RMBS transactions, and could be the catalyst to spark residential mortgage securitization into the booming market that bankers have been praying for.