Realizing the potential in the growing volume of commercial mortgage-backed securitizations in Japan, a number of domestic insurance companies are looking to boost their income through guaranteeing CMBS deals.

Leading the charge is Mitsui Marine & Fire Insurance, which recently announced it would guarantee the payment of interest and principal on real estate-backed securities, as well as market policies to insure the buildings and property in such deals from fire, environmental and default risks.

Such insurance would lower coupon rates for originators and provide more comfort for investors, said the firm.

But other insurance firms are not far behind. For example, Yasuda Fire & Marine Insurance Company is attempting to devise criteria with which it hopes to assess CMBS deals in the future, said Mitsuo Nakamura, manager in the financial guarantee division.

So far, the firm has not guaranteed any CMBS deals, but it is likely to consider transactions backed by high-quality mortgages in diverse locations that have received a shadow rating in advance of the guarantee, said Nakamura. "We still have not yet decided whether we will guarantee CMBS, but we are interested in this market," he commented.

Nakurma acknowledged, however, that the plummeting value of commercial property since the real estate bubble burst in 1991 will add to the risks of any guarantee. "The biggest problem is market risk. We think there is still market risk for mortgages, and the value of land is still very unstable," he said.

Also, since most Japanese securitizations are structured with little or no amortization, balloon risk is a great concern, as the value of the securitized real estate may not be sufficient to pay off the principal of the securities at maturity.

Such concerns mean that until land prices stabilize, most insurers will wait on the sidelines before entering the CMBS market, commented Yoshitaka Takahashi, manager in the investment and structured finance group at Tokio Marine & Fire.

"We are not confident enough to guarantee such deals now. We don't have any benchmark to assess real estate values, and the price volatility risk in commercial real estate is not something our department will manage," he said. VC

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