Small and medium-sized enterprise-backed securities (SMEs) made quite a showing in Japan's CDO market last year, Moody's Investors Service has found.

Recent research from the rating agency shows that 24 CDOs were released into the market in 2003, tallying about 4.24 trillion (US$36.2 million). Of that number, 60% of deal flow - 15 CDOs - were backed by loans for SMEs. These CDOs accounted for 3.01 trillion, or 70% of the market's volume, analysts found.

"Their growth is a natural result of efforts by Japan's central and local government to facilitate SME financing," said analysts in the report.

In an interesting twist, while volume was up over 2002, the number of actual CDOs dropped last year. Moody's rated 24 CDOs, a small decline from the 28 transactions that priced in 2002. The 4.24 trillion in total issuance was a 35% rise over the 3.14 trillion from 2002.

Perhaps in no other market was the recent tightening in spreads more dramatically demonstrated than in Japan, as all 24 Moody's-rated CDOs were balance-sheet vehicles. Arbitrage-type CDOs were shunned because recent spread tightening reduced the benefits of arbitrage, analysts found.

Approximately 0.64 trillion worth of deal flow, 13 in all, were cash-flow CDOs while 11 CDOs, or 3.6 trillion, were synthetic CDOs. In fact, synthetic CDOs accounted for about 85% of all 2003 Japanese CDOs. Funded synthetic CDOs totaled 0.87 trillion while unfunded totaled 2.73 trillion.

Sub-performing loan CLOs comprised a small amount of activity in the Japanese market last year. These were primarily CLOs backed by sub-standard loans and possible non-performing loans - a.k.a. bad loans though obligors continue repayments. The only sub-performing loan CLO issued with a public Moody's rating in 2003 was JPM-JNC 1 Trust, which was arranged by the Tokyo branch of J.P. Morgan Securities Asia Pte. Limited. The transaction was issued in December at 0.94 billion in size. The largest CDO on the radar was Ruby Capital One Limited, which closed in March 2003 at 977 billion, originated by UFJ Bank.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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