Japan's first securitization backed by non-performing real estate loans saw huge investor demand worldwide, according to Morgan Stanley Dean Witter & Co., arranger of the transaction.

The 21 billion ($206 million) issue by International Credit Recovery-Japan One Ltd. was structured as a Euro/144A. Roughly 60% of the issue was sold in Japan, while the remainder was evenly split between investors in the U.S. and Europe.

"All the tranches were heavily oversubscribed, particularly the senior and most junior ones," commented Douglas Kennedy, executive director of the securitized products group in Tokyo. "We had many inquiries from Japan, Europe, the U.S. and non-Japan Asia. What was particularly gratifying was the range of interest. We had inquiries from bond fund managers, insurance companies, corporates and banks."

The deal comprised four classes of notes. Class A was 13.5 billion with a yield of 35 basis points over three-month yen Libor, and rated triple-A by Standard & Poor's Ratings Services, Fitch IBCA, and Moody's Investors Service. Class B was 3.5 billion with a yield of 45 basis points over three-month yen Libor, and rated Aa2 by Moody's and AA by S&P and Fitch. Class C was 2.2 billion with a yield of 90 basis points over three-month yen Libor, and rated A2 by Moody's and A by S&P and Fitch. Class D was 1.8 billion with a yield of 200 basis points over three-month yen Libor, and rated Baa2 by Moody's and BBB by S&P and Fitch.

The notes are ultimately secured by 356 non-performing mortgage loans collateralized by over 600 mortgaged properties located around Tokyo. Investors were drawn to the short-dated paper, which offered a relatively good spread over comparable instruments such as commercial paper, said Kennedy. And though some Japanese investors balked because the issue was too short for them, nearly all took comfort from the high ratings secured from all three agencies.

Closing the transaction is a notable success for Morgan Stanley, which began work on the transaction early this year. It is significant because it may pave the way for more issues backed by non-performing assets in Japan, whose domestic banks are saddled with non-performing real estate-related loans with a face value of as much as $500 billion.

"We wanted this asset class to succeed very strongly, and that's why we made a huge investment in time and effort preparing the market for it," said Kennedy. "We got a lot of feedback from investors and ratings agencies in terms of how to structure this, [and] worked with the ratings agencies to ensure investors had sufficient information to analyze the deal and get approved by their credit committees, and that's what paid off in the end," he added.

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