Merrill Lynch in Japan has paid a high price for a pool of non-performing real estate loans at a Japanese bank asset sale held in December, leading to speculation that it is keen on becoming the next firm to securitize non-performing loans in Japan.

Merrill was the winning bidder at an auction held by the Cooperative Credit Purchasing Co. (CCPC), a government entity in Tokyo that buys non-performing loans from Japanese city banks and holds regular asset sales.

Merrill paid 39 billion ($375.5 million) for a portfolio of real estate loans originated by Long-Term Credit Bank of Japan, a failed bank the remaining assets of which were recently sold to U.S.-based Ripplewood Holdings. Other bidders at the CCPC auction included Morgan Stanley Dean Witter, Lone Star Fund, and Cerberus Group.

Merrill's bid so far exceeded some of the other investor bids that it is thought to be eager to securitize the LTCB assets, said sources familiar with the transaction. One expert involved in the auction suggested that Merrill had beaten the second highest bidder by many million dollars.

Whether Merrill plan a securitization or not, there is no doubt that U.S. investment banks in Japan are starting to eye securitization of non-performing loans with great interest and therefore bidding up the price of such assets.

After Morgan Stanley successfully securitized non-performing Japanese real estate assets for the first time last year, attention is focusing on the huge potential of bad loans sitting in Japanese banks.

Other players looking to gain a foothold in the new market reportedly include Nikko Salomon Smith Barney and Goldman Sachs. Morgan Stanley, which said that securitizing non-performing loans will be key to its business in Japan, is already working on a second real estate deal.

"It's mostly the U.S. firms who have the expertise to do this. Most Japanese firms don't have it," said another ABS expert. Still, an NPL-backed deal by Merrill or anyone else is not likely to be forthcoming anytime soon. "It took Morgan Stanley over a year to do their deal, and it's going to take anyone else a long time, too," he added.

Merrill Lynch officials did not return calls seeking comment.

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