Changes in the way Japanese businesses are being structured could result in a surge of activity in the securitization market, according to ABS professionals in the country.
They feel positive that factors such as industry consolidation and a revision of financial strategies will lead to companies increasingly becoming aware of, and seeing the benefits of, asset-backed transactions.
One of the major recent changes in Japan - although it is by no means exclusive to the country - has been the consolidation of many business sectors. Financial pressures, including a fall in profits, have resulted in a wave of mergers and takeovers, and even some of the biggest companies have been forced into alliances that would have previously been unthinkable.
Increasing strains on profits will lead to some fairly comprehensive transformations in company strategies, and it is this factor that is causing excitement among the securitization fraternity.
"A lot of bankers are confident about the effect restructuring is going to have on the ABS market in Japan," opinioned one head of securitization at an investment bank in Tokyo. "I believe that once firms start focusing on financial strategy, and see the benefits of the off-balance-sheet factor, then ABS will be to attractive to ignore."
According to the banker, the surge in interest could have a positive spin-off effect in terms of the way the markets are regulated in Japan. "Regulators are going to see this interest and hopefully will continue to make Japan even more conducive to securitization," he said. "Although most of the issues are mainly at the edges of legislation, we're hopeful that added growth will spur them toward detailed clarification and the establishment of a professional code as we've seen in the U.S."
In terms of individual sectors, he foresaw real opportunities in life assurance, consumer finance, but in particular the insurance sector. "In the next few years, you are going to see a wholesale restructuring of the sector, something that's long overdue," he explained. "For decades, the insurance sector has been paying out more than the investment coming in and that can't continue. Those pressures are going to force the industry to keep a more watchful eye on how businesses are run, and I can see securitization being a big part of that."
Another head of international securitization at an investment bank in London concurred with the view, although he had not heard anything specific at this stage. "Intellectually, it certainly makes sense because firms have got to start patching up their balance sheets," he said. "Even the banks are consolidating and are less reluctant to provide easy finance for business. Because firms are not going to be able to get that kind of funding from elsewhere, then clearly it makes sense for them to look at securitization."
Chinatsu Hani, research analyst with Merrill Lynch in Tokyo, feels that activity from consumer finance companies will rise in the future, as a result of firms now being allowed to issue bonds and from problems within the banking sector. "In the consumer finance sector, I think there's going to be a lot of issuance next year, and there are already a lot of deals in the pipeline," she said. "Earlier this year, companies were allowed to issue bonds. Because of constraints on bank lending and the resultant need to diversify funding sources, a lot of them have entered the asset-backed market."
Although Hani agreed that consolidation was a major trend in Japan, she was cautious in predicting significant growth in the ABS market. She argued that following the banks own period of consolidation, lending was on the rise again, which may lesson the need to seek alternative means of raising finance.