With more than 1 trillion ($7.96 billion) already issued year-to-date and 3 trillion (about $23 billion) expected for the year, the Japanese securitization markets are getting more and more fertile perhaps not by leaps and bounds, but certainly by fits and starts, sources say.
Market observers often draw parallels between the burgeoning market and its European counterpart, which finally took off a couple of years ago after issuers learned the benefits of securitization from balance-sheet management. Similarly, the Japanese market is now growing rapidly in certain segments, especially in the CMBS and the consumer-loan sectors.
"In Japan the laws are more securitization-friendly, and now we are seeing many more assets securitized, and investors have more appetite for these assets, but there is definitely a ways to go," said Douglas C. Renfield-Miller, a managing director at Ambac who oversees Asia, Australia and emerging-markets operations. "It is similar to what happened in Europe, in the sense that Europeans would never buy amortizing assets, and now you're seeing a lot of amortizing structures, as well as 20-year mortgage deals, fixed, floating and subordinated pieces. Investors are not as fixated on names now, and they are willing to look at other stuff and pick up additional spread."
Of course, "additional spread," by Japanese standards, is not a lot. Not only are spreads tight, but there is "not a lot of juice for a [monoline] wrap" in Japan, said Renfield-Miller. For the most part, Japanese securitizations contain high quality assets, and therefore, "the Japanese are able to get comfortable with leases and commoditized collateral right out of the box."
These commodity assets, such as autos, leases, shopping loans, and most recently, residential mortgages, have low subordination levels, and comprise the majority of Japanese securitizations. Many deals are being led by Japanese domestic banks, and are placed domestically. But one area where there is opportunity to wrap deals is in the consumer loan sector. "In Japan, as soon as something gets a taint, they run away," said Renfield-Miller. "Lots of deals are placed into conduits and the Japanese won't buy them, no matter what. So there is room there to get paid to wrap them."
Ambac has recently made efforts to get involved further in the commodity businesses. The insurer's alliance with YKFG, the first and only triple-A-rated guarantor licensed in Japan, has proved fruitful so far. "They have good relationships with Japanese investments and issuers, so we can economically get involved in the commoditized side of the business," he added.
As far as the Japanese CDO market, which is still in its infancy, the main roadblock is an analytical hurdle that has not yet been overcome: rating the underlying assets is a problem. Typically, the underlying corporates are not rated, although the rating agencies are developingmodels to map ratings of underlying portfolios. This becomes even more of a problem considering the mega-mergers of mega-banks that have taken place in the last year, leading to more assets that need to be analyzed.
Focus on Korea
The non-Japan Asian market is concentrated in Korea. According to a Merrill Lynch research report that came out last week, total year-to-date issuance out of non-Japan Asia is about $2 billion, and 99% of that emanates from Korea.
Not only do large players want to diversify and set up programs to access the U.S. and Euro market, but deals are rated and enhanced domestically. Other percolating markets are Malaysia, Hong Kong, the Phillipines and Singapore, although the sovereign ceilings in those countries make it tough to issue investment-grade paper.