Mizuho affiliate pools Japanese auto loans for U.S. investors

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A Mizuho Financial Group affiliate which pools portions of its Japanese prime auto loan originations to back U.S.-dollar denominated securities is marketing a new $418.2 million U.S. deal.

Orient Corp., or Orico, is including four classes of senior notes to be issued in the U.S. markets through OSCAR US 2017-2, a securitization of prime-quality retail auto loan contracts with yen currency receivables.

A one-year Class A-1 money-market tranche is sized at $61.8 million, with a preliminary P-1 rating from Moody’s Investors Service. The A-2 series in the transaction is a split fixed- and floating-rate tranche that will total $179.1 million in two-year notes, while the $91.8 million Class A-3 (due 2021) and $85.5 million in A-4 (due 2024) fixed-rate notes rounding the senior tranches of the capital stack.

Moody’s has assigned Aaa ratings to all of the multi-year senior notes.

The deal, issued through the OSCAR US Funding VII LLC trust, will also securitize a JPY3 billion (US$27.25 million) mezzanine loan, according to Moody’s.

The Aaa-rated notes have a hard credit enhancement consisting of 9.01% subordination plus excess spread.

The loans in the pool have total eligible receivables amount of JPY59 billion (or US$534 million) from 44,194 individual and commercial contracts that have a weighted average coupon of 6.2%. About 75% of the receivables are for new-car purchases, according to Moody's presale report. Nearly 35% of the loans are issued with terms between 49 and 60 months; nearly 20% carry extended terms of between 73 and 84 months.

Orico, founded in 1951, is a Japanese finance company that issues consumer loans for autos, credit cards and other retail installment contracts. It’s indirect lending program for vehicles include loans for both new and used cars, classified as either non-guaranteed receivables of standard credit risk or guaranteed loans from obligors of substandard credit ranking, according to Moody’s.

None of the loans in OSCAR US 2017-2 involve substandard loans.

The cumulative gross default rate expectation is 1.48%, according to Moody’s. Moody’s estimates the default rate rather than a loss rate since recovery rates for Japanese auto loans generally do not benefit senior note holders in a securitization (Orico holds subordinated beneficial interests in which it receives recoveries from the sale of repossessed vehicles).

Among the few risks associated with the deal is the inclusion of non-seasoned loans that fall within a three-month window allowing borrowers to suspend payments in auto loan agreements under certain circumstances, such as a vehicle defect.

A currency and rate swap counterparty is yet to be named, but Moody’s noted it will be a financial institution with a minimum corporate credit rating of Aa3.

The deal was underwritten by Mizuho Securities USA and BNP Paribas Securities. Mizuho Financial Group holds a 49% stake in Orico.

This is Orico's second transaction in 2017, preceded by the $313 million OSCAR 2017-1 transaction which closed in March.

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