Standard & Poor's has lowered its ratings on seven major Japanese banks, an action which has already affected a securitization in Latin America.

The $475 million Sovereign Investment Securities Two Ltd. deal has had its rating lowered from A-', watch negative, to BBB+'. The transaction was also taken off credit watch negative. Sovereign Investment Securities Two, a synthetic deal, closed in March 1999.

The action was taken following the lowering of the long-term credit ratings on the Bank of Tokyo-Mitsubishi (BTM) from A-', negative outlook, to BBB+'. BTM acts as a supporting rating to the notes in this securitization.

Other banks to have their ratings lowered, all part of the Mizuho Group, are as follows:

*Dai-Ichi Kangyo Bank (BBB+/watch neg/A2 to BBB/negative/A3);

*Fuji Bank (BBB+/watch neg/A2 to BBB/negative/A3);

*Industrial Bank of Japan (BBB+/watch neg/A2 to BBB/negative/A3);

*Yasuda Trust & Banking Co. (senior unsecured debt BBB/watch neg to BBB minus);

*Mitsubishi Tokyo Financial Group BOT Lease Co. (BBB/stable/A2 to BBB/negative/A2);

*Mitsubishi Trust & Banking Corp. (BBB+/watch neg/A2 to BBB+/negative/A2);

*Norinchukin Bank (A+/watch neg/A1 to A+/negative/A1);

*Sumitomo Mitsui Banking Corp. (BBB/negative/A2 BBB+/watch neg/A2);

*Sumitomo Trust & Banking Co. (BBB/watch neg/A2 to BBB/negative/A2);

*UFJ Bank Ltd/ (BBB+/watch neg/A2 to BBB/negative/A2); and

*UFJ Trust & Banking Co. (BBB/watch neg/A2 to BBB/negative/A2).

S&P says that the ratings were lowered because of further deterioration in the rating profiles of the banks. This is a result of their high levels of impaired assets, which are still growing; insufficient core earnings to meet credit costs; and growing shortfalls in capital to offset impaired assets and fund their operations.

The negative outlooks on the banks' ratings suggest that their asset quality will deteriorate further in an entrenched recession in Japan. It is becoming harder for financially weak companies to get funding, which could increase the failures of corporations and financial institutions.

The deflationary economy in Japan and increasing numbers of corporate bankruptcies are pressuring the asset quality of Japanese banks. The Financial Services Agency says that in September 2001 Japan's major banks had ´22 trillion in risk management loans, worth 7.1% of total loans, and 70% of the banks tier-one capital. This was up 13% from March 2001. In addition to this, the banks have a large number of loans on their books categorized as needing attention.

At the end of this fiscal year (March) the banks plan to commit ´6.4 trillion in credit costs to improve their reserve coverage, a rise from the ´4.7 trillion committed last year. But this may not be enough. Since 1998 the Japanese government has injected 10.5 trillion in public funds to 16 major banks and 11 regional banks. In most cases it was insufficient in dealing with problem assets and restoring the banks to a sound financial position.

S&P believes that the Japanese government will continue to protect creditors of the major banks by using its crisis management account. But it is not certain if the government will provide financial support in a timely and effective manner crucial if payments on transactions such as securitizations are to be maintained.

Moody's eyes Kris One

Meanwhile, Moody's Investors Service has placed 66.6 billion notes issued by Kris One Ltd. under review for possible downgrade, following its decision to place yen-denominated domestic securities issued or guaranteed by the government of Japan on review for downgrade. Kris is exposed to the credit risk of the Japanese government's domestic yen rating, and is currently rated Aaa' by Moody's.

However, Moody's has issued a statement saying that other structured financings will not be affected by the decision to place the Aa3' rating of Japanese government domestic securities on review for downgrade. Moody's says that the assets backing these transactions, which include auto loans, shopping loans and residential mortgages, are performing within expectations and have no direct exposure to the credit quality of the government of Japan. Foreign currency-denominated securitizations are also unaffected because the issuers and swap counterparties or guarantors are outside Japan.

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