Merrill Lynch Japan has been appointed by the Tokyo metropolitan government as structuring advisor for a proposed collateralized loan obligation (CLO) aimed at financing small- and medium-sized businesses in the city.

Under the plan, credit associations known as shinkin banks throughout Tokyo will originate loans, which will be transferred to Shinkin Trust Bank, the trustee of the transaction. Shinkin Trust will issue trust certificates to a special purpose company that will then issue notes backed by the cashflows on the loans, said a securitization banker at Merrill.

Shinkin banks are smaller, regional entities whose main business is lending to small- and mid-sized businesses in Japan. There are now 44 shinkin banks in the Tokyo area, he added.

The size of the deal will depend on how many loans the shinkin banks can originate, though he estimated that the debut issue would be between $50 million and $100 million and have a three-year maturity. The CLO will be structured as an ongoing program, as the Tokyo metropolitan government would likely ask other financial institutions to continue originating loans. Launch date is tentatively set for next March, prior to the fiscal-year end.

The CLO is meant to provide a broader investment base for local businesses, which in recent months have been in dire financial straits as a result of domestic banks tightening their credit. Shinkin banks have also grown much more careful about lending, as they too are saddled with massive bad debts, leaving small businesses hard pressed for funds.

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