In Japan, Mizuho Corporate Bank, a unit of Mizuho Financial Group, is joining forces with Morgan Stanley on a securitization of loans deemed as "requiring attention" under the country's Financial Reconstruction Law. Mizuho Securities will act as arranger on the 40 billion ($368.3 million) offering, a first of its kind for Japan.

While the underlying loans cannot be classed as nonperforming because the obligors are not bankrupt, they are effectively NPLs, as the borrowers cannot meet their existing loan requirements and currently get assistance from the lenders through waived interest.

Japanese banks are desperate to remove such loans from their balance sheets, due to pressures from local regulators, as well as meeting Basel II requirements. Currently, banks must set aside loan loss reserves for borrowers needing special attention. At the end of 2004, it was estimated loan-loss reserves for the country's biggest 11 banks was around 2.2 trillion.

With local investors showing an insatiable appetite for ABS paper, however, other banks could follow Mizuho's lead by going down the securitization route. The teaming up with Morgan Stanley can also be regarded as a smart ploy. The bank has established an excellent reputation in NPL resolution in Japan, using securitization extensively to this end.

On the Mizuho deal, Morgan Stanley's principal role will be as investor on the 10 billion subordinated tranche, as well as offering advice on loan servicing. The 30 billion senior trust beneficiary rights will be sold to institutional investors.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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