Like most Japanese institutional investors, Nippon Life Insurance Company is a newcomer when it comes to securitization. The company began buying domestic asset-backed issues just three years ago, when Japan's first securitization came to market, said Issei Sasaki, chief manager of the fixed income investment group in the treasury and capital markets department in Tokyo.

But with this year's explosion of domestic ABS issues, Nippon Life's asset-backed portfolio is set to grow rapidly. "Corporate bond spreads in Japan have been very tight, which makes ABS look relatively cheap. Our current ABS portfolio is very small and we have not established a future target, but the number of investments will increase," Sasaki predicted.

That is good news for ABS originators in Japan, where most domestic investors have yet to overcome a reluctance to buy asset-backed issues. Nippon Life the world's largest mutual life concern currently has 130 billion ($1.07 billion) in its domestic ABS portfolio, up from 100 billion last year. That amounts to just 1% of the firm's total bond portfolio, leaving plenty of room for future growth (foreign ABS issues are bought separately by the firm's international investment division). In comparison, corporate bonds account for roughly 10% of the firm's entire bond portfolio. "The limit on ABS investments established by the back office is 20% of the total bond portfolio, but this is not a definite target," added Sasaki.

Keen on Real Estate

At the moment, real estate-backed deals offer the greatest value compared to other asset classes, said Sasaki. Japan's first commercial and residential mortgage-backed transactions were launched in the spring, and the number of MBS deals is expected to snowball as more financial and real estate firms shed their property assets and restructure their balance sheets. Until now, Nippon Life has not invested in any securitizations backed by real estate, although it is now considering a CMBS deal, he added.

"I believe that residential and commercial MBS will be the most profitable, because they're so new in Japan and the yield is higher compared to corporate bonds. The greater risk comes from the uncertainty of the underlying cashflows, but that provides additional spread," he explained. So far, Nippon Life has mostly invested in deals backed by auto loans and lease receivables, and though these assets are very familiar, "they don't provide extra spread".

Residential MBS: Safest Bet

Issuers and arrangers have made much of Japan's famously low consumer default rate, and Sasaki agrees that Japanese residential MBS deals are underpinned by relatively low-risk assets, making them preferable over those backed by commercial properties. "I prefer residential MBS, because it is a very stable asset in terms of credit. In addition, the market size will expand rapidly once the [Government Housing Loan Corp.] securitizes its portfolio," he commented, adding that that will happen once the government passes the necessary legislation at the end of next year.

However, Nippon Life did not invest in Japan's first residential mortgage backed-deal recently closed by Sanwa Bank, due to limitations of its back office system. Like most domestic investors, its system is not equipped to book long-dated, pass-through securities, which effectively limits purchases to short-dated bullets. "The Sanwa MBS deal was long-dated amortizing paper, [which] we don't invest in because of our back office constraints. If we didn't have this problem, we would consider buying it," Sasaki explained, adding that at least for the short term the firm favors fixed-rate securities with maturities between three and five years.

As for noteworthy commercial mortgage-backed deals, Sasaki cited the recent transaction issued by Sumquest, backed by income from five office buildings owned by Sumitomo Realty and Development and arranged by Daiwa Securities SB Capital Markets (ASRI 5/31/99, p.2). Due to high liquidity in the domestic market, domestic investors snapped up the issue even before it was launched, said Sasaki.

No Credit-Linked Structures

Going forward, Nippon Life will be on the lookout for CMBS deals like the Sumquest transaction that are de-linked from the credit quality of the originator. Until now, most Japanese CMBS deals have been guaranteed by the originators, a reflection of the insufficient cashflow generated by the underlying properties and the fact that the securitization is usually done to take advantage of tax breaks from writing off loan losses. "The only credit enhancement in those deals is the originator's guarantee, which we are trying to avoid," Sasaki said. VC

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