Only two years ago, nearly all Japanese securitization deals were placed in the international markets, so it is a remarkable turnaround that IFCO, the financing arm of Japanese commercial vehicle manufacturer Isuzu Motors, recently closed the first Japanese securitization this year to be aimed primarily at the international markets.

In the past, Japanese investors were wary of and knew little about securitization, but that has changed with stunning rapidity, as Japanese investors have become eager buyers of ABS and have put in a considerable effort to upgrade their back-office systems and their knowledge.

Perhaps the biggest reason for the drastic turnaround, though, is that Japanese investors eager for highly rated assets have little alternative to securitized paper. "Lets face it - how many high quality assets are there available in the domestic Japanese market?" asked one expert on Japanese ABS. "If you look at corporate Japan there are very few companies that can even manage a single-A rating from one of the Western agencies. Even Japanese government bonds now have split ratings and are on negative watch with Moody's. So what else do people buy if they want triple-A assets?"

On the other hand, international investors - while often keen on exposure to famously reliable individual Japanese obligors - are still wary of the possibility of originator default. Consequently, they often have to do more work to analyze a Japanese deal than they would do for one from elsewhere and ask to be compensated for that in the price. The "Japan premium", at least for corporates, still exists, experts said.

Japan has also seen an increased acceptance of passthrough deals, partly in expectation of the Government Housing Loan Corp.'s program of MBS deals, which will use passthrough structures, and partly as issuers have made greater use of domestically targeted Euroyen deals which avoid the cumbersome registration rules for true domestic bonds (for three weeks before a coupon payment domestic bonds can't be registered in a new name, making trading of cashflow-efficient monthly passthroughs difficult).

All this means that, at least as far as the cost of funding is concerned, there is now little incentive for issuers to go overseas. But price is not all, as IFCO's decision to tap international investors shows.

"The key criteria for IFCO were two-fold: to achieve competitive funding costs, and to diversify their investor base," said Richard Tarn, a syndicate official at DKB International in London, which arranged the IFCO deal. "They could quite clearly tap the domestic market and if they did then certainly in yen Libor terms the spread would be tighter. But this approach would not have maximised the benefits of the deal in terms of developing a wider investor base."

The passthrough deal, which is IFCO's second ABS, was worth $182 million and was rated Aaa by Moody's Investors Service and AAA by Standard & Poor's. It priced at one-month dollar Libor plus 29 basis points and has an expected average life of 1.06 years.

The deal is secured by a pool of over 14,000 autoloans and comes ultimately via a Cayman Islands SPC called Forest Funding Corp. II. Dai-Ichi Kangyo Fuji Trust & Banking acts as the trustee, with Merrill Lynch Derivative Products providing the swap that converts the fixed rate yen cashflows in floating rate dollar payments to investors.

Credit enhancement of an initial 22.47% comes from retained subordinated beneficial interest certificates, plus a fully funded reserve account of Y396 million ($3.6 million).

According to Moody's, that level of credit enhancement is relatively high for Japanese autoloan deals, reflecting the fact that the loans finance the purchase of commercial vehicles, such as trucks and buses, which are considered to be more susceptible to volatility in the business climate than family vehicles.

And, judging by the enthusiastic reception - the bonds were oversubscribed and the book closed before launch - IFCO has considerably widened its audience. Investors came from the U.K., Europe, the Middle East and non-Japan Asia, Tarn said.

Tight in Japan

As if to demonstrate the difference between the price of funding at home and abroad, Kokunai Shinpan, one of Japan's largest consumer credit companies, chose to stay at home with its autoloan-backed securitization, a deal worth 22.1 billion, via IBJ Securities.

The passthrough transaction, which was also rated Aaa by Moody's, priced at only 10 basis points over one-month yen Libor, giving it the lowest spread for a passthrough autoloan deal yet seen in Japan, an IBJ official said.

The deal is the company's second term ABS and came via a Cayman Islands SPC called KC Prime Finance II. It has a 2005 final maturity, the official added, though he declined to give the average life, saying that it would be disclosed later.

The autoloans, which have a minimum seasoning requirement set by Moody's, are transferred to IBJ Trust & Banking, which issues senior and subordinated beneficial interest certificates. The retained subordinated certificates provide credit enhancement worth 11.6% of the senior piece and the final bonds were placed with local insurance companies and banks.

Extra credit enhancement comes from a cash reserve equal to 0.44% of the initial pool.

IFCO's deal may have been the first international transaction for some time, but at least one more is likely to follow in the near future. The next in Orient Corp.'s Oscar Funding series - the closest thing to a benchmark for internationally placed Japanese asset backeds - is on its way, with a close date of late summer or early fall, according to market sources. DKB International is expected to be lead manager.

That deal will follow a domestic securitization from the same issuer, in the shape of a 30.5 billion issue, with triple-A ratings from S&P and Moody's. It is expected in the market soon.

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