Japan's Shinsei Trust & Banking Co. has become the second financial institution in as many months to be punished by regulators for activities related to its real estate securitization group.
The Financial Services Agency (FSA) imposed a one-year ban on Shinsei generating new business from real estate investment trusts. The move came as a result of the firm including properties in securitization deals that either violated the Construction Standards Law or were significantly overvalued. Both actions contravene Japan's Trust Law.
According to the FSA, despite knowingly violating regulations, Shinsei hid its findings and consequently exposed investors to risks. With retail investors among those affected, added to concern over what impact Shinsei's breaches might have on the entire securitization market, the FSA decided to impose the strictest possible penalty.
In addition to the one-year suspension, Shinsei has been ordered to re-inspect properties held by its trust unit, adjust valuations and improve internal monitoring safeguards. In a related move, Shinsei announced sizeable pay cuts for senior officials in its trust group.
The case of JPMorgan
Shinsei's punishment comes one month after JPMorgan Trust Bank fell foul of the FSA for similar misevaluation of properties included in real estate investment products (ASR, 04/24/06). JPMorgan was suspended for six months.
Despite the FSA's fears for the securitization market, Fitch Ratings said the actions against Shinsei "has no immediate impact on Fitch-rated Japanese asset-backed securities," adding: "there is no immediate significant concern relating to Shinsei Trust Bank's ability to perform as a real estate trustee."
On a more positive note, Japan's Association of Real Estate Securitization said last week it expects the real estate investment trust business to hit Y5 trillion ($44 billion) by the end of 2007. The REIT market's current total capitalization is around Y3.4 trillion.
With Japan's economy finally rebounding after more than a decade of stagnation, land prices are increasing as a result. Private funds have been keen to tap into the growth, accounting for around 80% of the current investment in REITs.
The association expects pension funds to increase their holdings over time, which should boost market capitalization to around Y10 trillion in the next few years.
Staying in Japan, Central Finance - one of the country's largest consumer finance companies - last week launched a 10 billion deal backed by credit card receivables. Mitsubishi UFJ Securities is the appointed arranger on the seven-year offering, issued through the CF Card Cashing Receivable special purpose trust.
The deal comprises 9 billion of senior notes, rated triple-A by Moody's Investor's Service, and a 1 billion mezzanine piece, rated A2. The expected average life has yet to be determined. Secondary spreads on credit card deals range from 20 basis points on three-year triple-A paper to 30 points over Japanese Libor on four-year bonds.
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