In an attempt to boost transparency and, ultimately, liquidity in the Japanese securitization market, Bank of Japan (BOJ) will begin releasing a monthly survey of ABS deals, starting in May.
The move results from discussions with market practitioners, ongoing since BOJ first established a forum last November to identify obstacles in the market's development and possible solutions.
BOJ became more involved in the ABS market last August, when it began purchasing ABS and ABCP with the aim of providing funds to small and medium-sized enterprises (SMEs). To date, the bank has invested 1 billion (US$9.1 million) in the scheme, including double-B paper.
For many players, poor disclosure is the single biggest problem Japan's securitization business faces as it leads to inconsistent and, in some cases, unfair pricing. BOJ hopes its surveys - which will cover reported issues of securities, trust certificates and ABCP - will help to address this issue.
However, improving transparency is a tough task given how Japan's market has developed in the past three years. "Pre-2001, many deals were placed widely and internationally, so there was a higher degree of transparency," said Chinatsu Hani, senior structured product analyst at Merrill Lynch. "Since, with the interest rate falling and credit spreads tightening dramatically in Japan, the domestic investor base developed and has become increasingly hungry for ABS paper. More recently, there has been so much demand that most deals place privately, so there has been less need for detailed disclosure."
According to Hani, around 90% of deals are placed privately, which makes it extremely difficult to track the level of issuance, never mind pricing levels. "For an ABS analyst like me, I can only grasp the issuance volume through rating agency reports and media stories, whereas there are a lot of private transactions I cannot grasp," explained Tomohiro Miyasaka, senior ABS analyst at Credit Suisse First Boston. "With the survey, I hope many investment banks will report self-arranged deals, including private ones, to BOJ so market participants at least can know more precisely issuance levels."
Nonetheless, Hani remains cautious on how successful the surveys will prove. "The data will be compiled on a voluntary basis, primarily through arrangers of ABS deals, so therefore we are unsure as to what extent the information will be captured through the survey," she added. "If the majority of transactions are included and originators have incentives to provide information to BOJ, the effort may be effective. At the same time, I am not sure how they are going to capture deals that are in trust certificate form, which do not necessarily utilize arrangers."
As Hani suggests, perhaps the biggest impediment to transparency and liquidity is the dominance of trust certificate deals in Japan. Previously, the standard ABS deal would see the transfer of assets to a trust account, from where the trust bank issues trust certificates - both senior and junior. The originator would retain the junior certificates and then sell the senior certificates to a special purpose company, which would then issue bonds that are legal securities and tradable.
Today, the feeling is that it makes less sense to go through the costly procedure of setting up SPCs when trust certificates can be sold directly to investors who are willing to buy and hold the paper. However, with the exception of RMBS and CLOs originated by banks, trust certificates are not tradable and are private in nature, which does nothing to promote disclosure.
In 2000, 35% of issuance was in trust certificate form. But by the end of 2003, the figure had risen to 63% and is anticipated to grow, albeit more slightly, in 2004. With the dominance of this type of transaction and the buy-to-hold mentality of Japanese investors, BOJ's monthly surveys may improve transparency slightly, but a solution to the liquidity problem could prove more elusive.
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