At least two CDOs backed by SME collateral priced in Japan's CDO market last quarter, leading to anticipation that SME CLOs will be the busiest area of issuance for this growing Asian market place.

In addition to other deals, Wakaba Co. Ltd. and Wide Area CLO were noted by analysts from Moody's Investors Service as emerging structures that closed last quarter.

Wakaba Co. is a synthetic CBO referencing private-placement bonds issued by Japanese SMEs. Wide Area CLO is the first securitization utilizing the Japanese Finance Corp. for Small and Medium Enterprise purchase mechanism, said Moody's Vice President and Senior Credit Officer Yusuke Seki. Four local governments promoted participation in Japanese Finance Corp. to financial institutions, which made loans to small to medium sized enterprises, which were then purchased by Japanese Finance Corp. for the end purpose of securitization, said last week's Moody's report.

Sumitomo Mitsui Banking Corp. and UFJ Bank Ltd. also issued SME-backed CLOs in their existing CLO series last quarter.

Seki called attention to concerns over the implementation over BASEL II and the Japanese CDO market at a recent Moody's seminar. "Some panelists in the seminar showed concern that the CLOs/CBOs of Japanese small regional banks are likely to be negatively impacted by the new guidelines, because those banks would have to adopt the standardized approach in which there is no limit on deduction from capital regarding equities they hold," Seki noted.

Concerns aside, business was healthy last quarter for CDOs in Japan. Nine CDOs totaling 300 billion were rated by Moody's in 3Q04, bringing the year's total to 610 billion of CDOs rated by Moody's. Of the nine, four CDOs were backed by SMEs, three by corporate loans to major companies and two were backed by sub-performing loans. The ratings agency upgraded six Japanese transactions for the quarter.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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