Sakura Trust & Banking Co. has developed a new payment collection system designed to minimize one of the most intractable problems facing the Japanese securitization market.
The company has developed the new system in an attempt to mitigate so-called co-mingling risk, which is the risk that in the event of a servicer's bankruptcy receivables will be frozen in its bank account before it has passed them on to the deal's trust or SPC.
Because of this risk Japanese securitizations often have considerable credit enhancement, in order to make sure investors do not lose out.
"You could have credit support of 10%, of which 6% is to address co-mingling risk and only 4% is to address the possible credit loss; it could be as much as that," said Yu-Tsung Chang, managing director at Standard & Poor's in Tokyo, who stressed that he hadn't seen the details of the new system. "Therefore mitigating co-mingling risk could actually reduce your credit support significantly."
The most effective way of eliminating that risk is for obligors to make payments directly to the trust or SPC, but this causes administrative headaches and, more importantly, is avoided by Japanese issuers because it is necessary to seek each obligor's permission, something that may damage commercial relations.
Sakura Trust think that their new system is the next best thing, as it would allow for daily automatic transfers from the servicing companies bank account directly to the trust, meaning that the co-mingling risk is reduced to just that one day. However, experts pointed out that even if the co-mingling was reduced to one day, if the day that a servicer goes bankrupt is the same day that a large chunk of receivables is deposited, the risk is still significant.
Naoki Yamauchi, managing director of Moody's Investors Service in Tokyo, gave a guarded welcome to the system, though he also hadn't seen the details. "Moody's sizes co-mingling risk depending on the cash transfer structure from the servicer," he said. "It is basically one- to two-months' worth for standard ABS transactions in Japan. I think this system will mitigate the risk, but even if the exposure period is one day, Moody's will still need to discuss the co-mingling risk."
Yamauchi added that in Japan payment on the underlying obligations to the servicer usually takes place on the 5th, 10th, 15th, 20th, 25th and at the end of the month, with the payments on the 25th and at the end of the month often representing over 50% of the collections. Hence, even a system that transfers out receivables every day will not entirely eliminate co-mingling risk.
