Japan's first non-performing loan-backed securitization is set for launch before the end of November, said sources in Tokyo. (ASRI 11/1/99, p.1).

Morgan Stanley Dean Witter is now marketing the 22.8 billion ($217 million) issue to investors in Japan and the Euromarket. A Cayman Islands SPC called International Credit Recovery-Japan One Ltd. will issue four classes of floating-rate notes, which are ultimately backed by a pool of non-performing loans collateralized by real estate purchased from Japanese financial institutions at a heavy discount by Morgan Stanley Real Estate Fund. Morgan Stanley will keep a 1.8 billion equity piece.

Residential property makes up the bulk of the portfolio (38%), followed by retail space (22%) and hotels and offices located mostly in the Tokyo area. Cashflow will come from the resolution of assets through foreclosure, voluntary sale, and discounted pay-off via special servicers.

The servicing will be performed by Lombard Servicing and Kearny Global Investors, both wholly-owned subsidiaries of Morgan Stanley Realty, as well as several other subcontractors. Morgan Stanley's past experience in working out sub-performing loans in the U.S. and Italy was a significant strength in the transaction, according to a pre-sale report from Fitch IBCA.

The transaction is a so-called fast-pay structure, meaning that incoming cash will be used to pay down the bonds and result in faster payment of principal. Due to the uncertain amortization schedule, the issued notes will be of the pass-through type, not the bullets typically favored by Japanese investors.

The pass-through notes, relatively complex structure, and newness of the assets in general could make the transaction more attractive to non-Japanese investors, though Morgan Stanley has reportedly said that the deal is over-subscribed. "I won't be surprised if this sells out quickly because domestic investors are looking for ample spread," commented one ABS banker in Tokyo.

The deal has already received prospective ratings from Fitch IBCA: class A was rated triple-A, class B was rated double-A, class C was rated single-A, and class D was rated triple-B. Moody's and Standard & Poor's are also expected to rate the transaction.

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