Japan-based supermarket operator Mycal Corp. filed for bankruptcy and made history this month when it failed to make the payments on its Multiple Asset Funding ABS transaction, issued in 1997, marking the first Japanese ABS default ever.
In a report last week, Merrill Lynch said the default has caused investors to pay closer attention to the links between originator credit and asset-backed securities. In the Mycal deal, as well as in several others, the ABS is credit-linked, which means it ultimately relies on the credit quality of the originator. However, the report indicated that previous research conducted demonstrated that in the case of Mycal transactions, most ABS investors were seemingly aware of the links between the originator credit and the ABS deal. The company's research has also indicated there were no reactions at hand in the ABS spreads.
However, Merrill notes that investors may become more cautious about the tenant credit quality in CMBS transactions, particularly for sale-and-leaseback CMBS, as was the case in the Unites States CMBS market after the World Trade Center disaster.
Moody's Investors Service has placed all of Mycal's CMBS transactions on negative watch. However, Merrill notes that it does not expect the bonds to default, mainly because of the available cash reserves and overcollateralization which it has in the form of the LTV.
Additionally, Moody's has downgraded Daiei Corp., a major retailer in Japan, to Caa1 from B2. According to the rating agency, Mycal's move toward bankruptcy has weakened earnings from highly leveraged retail companies.