In an attempt to encourage Japanese banks to rid themselves of bad debt, the Japanese government is bringing its first non-performing loan securitization to market in which it will act as both trustee and servicer.

Marking the first time that the government has stepped in to rid the banking sector of its millions of dollars of bad loans, Resolution & Collection Corp. (RCC), a governmental agency, has mandated Goldman Sachs and Mitsubishi Trust & Banking Corp. to lead the Yen 9.6 billion (U.S. $7.2 million) securitization. The transaction, RCC Trust 1 2002-1, is expected to launch this month, and will be privately placed within the Japanese market.

The non-performing loans in the transaction are defaulted real estate-backed loans. While Japanese banks are currently able to sell off assets to opportunity funds, the government has now opened the door for them to use an alternate source of funding that allows the banks to get rid of their bad credits in an efficient manner.

According to sources close to the deal, there has not yet been an adequate solution to the very high levels of bad loans on Japanese banks' balance sheets. Therefore, this transaction is unique because of the involvement of a governmental agency as a trustee and a servicer; furthermore, this is the first transaction in which RCC will assist in the securitization of defaulted real estate loans.

The non-performing loans will be delegated to both Mitsubishi Trust & Banking Corp. and RCC, and the two will act as joint trustees, by a special-purpose company established by Goldman Sachs. KK Minato Saiken Kaishu will be the special servicer for this transaction, and will also subcontract part of its duties to RCC. Investors will purchase senior beneficiary certificates backed by the entrusted NPLs.

One market source noted that the government chose to work with Goldman Sachs because of the firm's prior expertise in completing non-performing loan deals using a trust structure with Mitsubishi Trust Bank. Morgan Stanley has also been involved with prior non-performing loan deals completed by Japanese banks, sources say, but had never worked with this particular trust structure.

Standard and Poor's, the sole rating agency on the transaction, has assigned preliminary ratings of AAA' to Class 1, AA' to Class 2, A' to Class 3, and BBB to Class 4.

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