The Japanese commercial mortgage-backed securities (CMBS) market saw rapid growth in 2000, says a recent Moody's Investors Service report, and should continue to demonstrate booming growth in 2001.

Moody's reports that since last year Japanese banks and financial institutions have become increasingly active in providing non-recourse loans collateralized by real estates, and as these pools accumulate volume they are likely to repackaged as CMBS.

Potential originators include real estate, retailing and manufacturing companies who are under pressure to reduce the assets on their balance sheets. CMBS and real estate investment trusts (REITs) are expected to become more popular. Moody's also predicts that there should be a market for mezzanine tranches and subordinated tranches, because new accounting regulations don't allow originators to remove securitized assets from their balance sheets unless the subordinated portion is less than 5% to 10%.

Recent CMBS transactions include the 3 billion Japan Residential Capital Ltd transaction, arranged by TD Securities. The notes are secured by 3.4 billion bonds issued by Prime Property Funding, a Cayman Islands special purpose company (SPC).

JRC will purchase these with the 3 billion bond issue, and 600 million of preferred shares. The 3.4 billion bonds are secured by cash accounts and mortgages attached to a revolving pool of properties purchased by IC Asset. IC Asset will purchase the assets with a 3.4 billion loan from Prime Property.

"The collateral in this transaction is not in a fixed pool of assets, because the SPC will continuously purchase and sell condominia during the three year revolving term," explained Tomoyoshi Omuro, at Standard & Poor's (S&P) in Tokyo. This process, whereby companies buy unsold bulk real estate at a steep discount, refurbish it, and resell it to retail purchasers is known in Japan as kaitori. The kaitori market is well established in Japan and about 150 companies, known as kaitori gyosha, operate in it.

Omuro continues: "This is the first time that Kaitori market participants have done a securitization. A very advanced financing technique has been introduced to this market. I think securitizations of these assets may increase, since many Japanese corporates that traditionally owned condominia as company dormitories for their employees, have started to off-load them from their balance sheets in the course of restructuring."

Many kaitori gyosha are currently having difficulty securing financing, partly because Japanese banks are reluctant to lend to real-estate related businesses.

Insured Capital, an experienced kaitori gyosha, acted as an adviser on the transaction. S&P says that the presence of Insured Capital as adviser was one of the key factors in assigning ratings to the transaction. Through the transaction, Insured Capital will provide investors access to the kaitori market. Insured Capital was set up in 1998, and is attempting to become a leader in the Japanese kairoi market by introducing new means of financing.

Omuro says that S&P also took special care that the purchase and sale of the condominia are conducted under a strict investment policy. And in order to further reduce the risk of transaction, S&P ensured that the transaction incorporates a special mechanism to lower the leverage level.

He adds: "The reason that this revolving type of transaction worked is because of the homogeneity' of the asset - condominia."

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