Not long after Japan closed its first-ever public securitization of auto leases with maintenance clauses, two more deals are lining up investors.

Analysts expect the new asset class - long considered unsuitable for securitization - to become increasingly common. Several other "maintenance lease" deals are already in the pipeline, likely to come after April.

Standard & Poor's analyst Eriko Yamaguchi said Japanese leasing companies have been aggressively pursuing maintenance riders lately, as a way to boost revenue.

"A maintenance auto lease is more profitable than a normal finance lease," Yamaguchi said.

The growing volume of maintenance leases heightened interest in securitizing these assets.

All the deals include a "backup maintenance servicer" - a key issue for the rating agencies. If a leasing company fails, the backup will collect the lease payments and maintain the vehicles.

One of the two deals currently in the market is expected to close this week. Daiwa Securities SMBC Co. is arranging the JPY10.3 billion transaction, originated by SMBC Auto Leasing Co. and issued through SMBC Auto Leasing Co. Auto Lease Receivables Senior Trust. Both Moody's Investors Service and S&P assigned triple-A preliminary ratings.

The trust certificates, due October 2009, reportedly come with a coupon of 0.55%. The deal is believed to have multiple classes, but details about the size of each class were unavailable.

The backup maintenance servicer is Sumisho Auto Leasing Corp.

The other deal, worth JPY5.945 billion, is scheduled to close at the end of the month. In this deal, being arranged by Central Leasing Co. for three originators, the trust certificates are divided into two classes, JPY5.75 billion in Class 1-B1 and JPY195 million in Class 1-C1. Both tranches, issued through Central Leasing Auto Lease Master Trust Series 1, are rated triple-A by S&P.

The backup maintenance servicer is NTT Auto Leasing Co.

Playing backup

NTT Auto just recently announced that it would offer backup servicing for the securitization of maintenance leases. And the company is already gaining momentum in the market. It expects to be named backup on an upcoming JPY20 billion maintenance lease deal.

S&P's Yamaguchi said the requirement for a backup maintenance servicer troubled leasing companies in the past. The backup would need to calculate how much profit they could earn after taking over the maintenance - "to judge if it's OK to get into the agreement." But originators were reluctant to share that information. Consequently, only a few confidential deals occurred.

However, following the inaugural public deal in February, that reluctance seems to be fading. Yamaguchi speculated that the growing volume of maintenance leases provided enough incentive to change the attitudes of potential issuers. "Probably they think it's more important to securitize than to stick to keeping their business secrets," the analyst said.

IFCO Inc., which is owned by Isuzu Motors, originated that first deal in February and won a triple-A rating from S&P. Orix Corp. arranged the JPY27.7 billion in trust certificates, due November 2010.

Getting innovative

Chinatsu Hani, a Merrill Lynch analyst, described the maintenance lease deals as "innovative."

She said maintenance leases were considered unsuitable for securitization in the past because several issues could arise if the originator goes bankrupt.

One legal risk: the lease contract could be cancelled as a result of the maintenance being terminated. The structure of the recent deals mitigates this risk by clearly distinguishing between the maintenance component and the lease component of the payment, Hani said.

The appointment of a backup to continue maintenance also reduces the risk that customers will discontinue making lease payments, she said.

Another issue is that such lease receivables have a residual value ranging from 10% to 30%, creating a claw-back risk under the current bankruptcy law, Hani said. But the law is expected to be revised, she said.

For cars only

Deutsche Bank analyst Yukio Egawa said Moody's is the only agency to release its rating rationale for auto leases with maintenance clauses. He generally agrees with Moody's - at least for passenger cars. Egawa said thousands of repair shops could perform regular maintenance on cars, so a backup servicer should be fine.

But, he pointed out, commercial trucks would require more analysis. "Unlike cars, replacing service providers without relying on the truck manufacturer may not be practical," he said.

Survivability of the manufacturer should be seriously considered in the case of mainframe computers as well, Egawa said. "Fujitsu computers can never be maintained by IBM, for example, so there is no ultimate replaceability of the maintenance service provider."

Given those limitations, Egawa doubts the structural breakthrough will be useful for other types of assets. But he anticipates an increase in maintenance lease deals with cars.

http://www.asreport.com

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