While securitization pros elsewhere were lazing about on the beach, Japanese securitizers were busier than ever. The domestic market absorbed three of the largest deals yet seen, with no evidence that investors were filling up. Indeed, syndicate officials said demand was strong, despite the glut, as investors have little alternative to securitized paper.
The biggest of the three and the country's largest ever rated securitization, was a 208.1 billion ($1.97 billion) transaction from Dai-Ichi Mutual Life Insurance Co., Japan's second largest life insurer. The deal - called Mortgage Income Certificate (or Magic) - parcels Dai-Ichi Life's entire residential mortgage portfolio and was sold by IBJ Securities.
It is structured as a monthly pay passthrough and backed by just over 20,000 residential mortgages worth 231.2 billion and with an average of eight-years seasoning.
The deal is chopped into five tranches, rated between triple-A and triple-B by Moody's Investors Service and Standard & Poor's, all with final maturities of 2037. Credit enhancement comes from an unrated subordinated beneficiary interest certificate worth 10.1% of the pool, plus a cash reserve.
The deal also features a "semi-turbo" feature, which sees cash leftover after the payment of interest on the subordinated trust certificates used to pay down senior principal.
As always with Japanese RMBS deals, the deal has to address a problem that has dogged the market since its inception in 1999 - the fact that mortgages issued by most lenders are guaranteed by a subsidiary company, who consequently have first lien on the underlying properties. This means that the transfer of the security interest in the properties into the trust or SPC is problematic and there is some question that the transaction will be able foreclose on a property if the subsidiary guarantor has gone bankrupt.
The market has been divided in the past as to how significant a problem this was, with the two largest rating agencies on either side of the divide.
In this instance, the mortgages themselves are transferred to a trust held by IBJ Trust & Banking, with the indemnity rights on the mortgage guarantees sold separately by the guarantor (called Dai-Ichi Personal Credit Guarantee or DPC) to a separate trust also held by IBJ Trust & Banking. The second trust beneficiary certificate is held by the first and is called on if a loan defaults.
In Moody's opinion, it will be possible to enforce the mortgage whether or not the guarantor has gone bankrupt, so the agency gives full credit in its rating to expected recoveries.
S&P, on the other hand, only gives partial credit to the prospect of recoveries. "The best way to look at it is that the credit on the mortgages will not work if the guaranteeing subsidiary goes bust," said Kenji Kondo, of S&P's Tokyo office. "So we rated that subsidiary, and as long as the rated tranche of Magic is below that rating on the subsidiary we gave recovery credit."
In effect, this means that S&P only gives credit for recoveries to the lowest rated tranche, which it rates at BBB-plus.
The five tranches are: a 78.6 billion chunk, rated Aaa/AAA, with a coupon of 0.97% and a 1.52 years; a 78.6 billion piece, rated Aaa/AAA, which pays one-month Libor plus 30 basis points and has a 5.33-year average life; a 8.7 billion piece, rated Aa1/AA, with a coupon of 2.29% and a 8.12-year average life; a 2.3 billion chunk, with ratings of Aa2/AA-minus, paying 2.41% and with a 8.58-year average life; and finally a 39.9 billion tranche, rated Baa1/BBB-plus with an average life of 10.7 years and a yield of 130 basis points over Libor.
According to a IBJ Securities official, the deal was placed with more than 20 domestic investors, including banks and insurance firms.
Next in size came a deal from another life insurer, this time the country's biggest, Nippon Life Insurance Co. The deal, which is backed by "kikin funds" - a form of subordinated debt - totaled 180 billion and was privately placed by Daiwa SB Capital Markets and Nomura Securities.
The passthrough transaction, which is the first securitization of kikin funds, came via Funds SPC Series One and was split into four tranches. Tranche A was 30 billion of two-year notes with a coupon of 0.85%; Tranche B was 50 billion of three-year notes, with a coupon of 1.14%; Tranche C was 50 billion of four-year bonds, with a coupon of 1.44%; and Tranche D was 50 billion of five-year notes, with a coupon of 1.7%.
All of the tranches were rated at AA-minus by S&P. Daiwa SB sold tranches A and C, while Nomura was responsible for the other two.
According to a syndicate official at Daiwa SB, the deal needed to be extensively premarketed in order to explain a new asset class, but demand was strong with all the tranches oversubscribed at launch. The official declined to give details about who the deal was sold to.
Not to be left out in a month of jumbo's, Merrill Lynch closed the largest ever CMBS deal in Japan, with a 108.1 billion deal backed by revenues from Seibu Department Stores' flagship store in Tokyo (ASRI 8/14/2000 p.3)
The deal is made up of 78.1 billion of bonds, plus an extra 30 billion worth of mezzanine capital provided by the Development Bank of Japan. The bonds came through an SPC called Japan Retail Corp. 1 and were split into four tranches, rated by Moody's.
The tranches were two Aaa-rated pieces, each worth 20 billion; an Aa1 piece worth 26.3 billion; and a Ba2 chunk, worth 11.8 billion. The expected maturities for all the tranches are 2005, with final maturities two and a half years later. The first tranche has a coupon of 1.307%, the second pays 1.605% and the third pays 1.755%. The non-investment grade piece boasts a spread of around 400 basis points over Libor.
A Merrill official was keen to stress the placement of the lowest tranche, suggesting that it confirms the emergence of a non-investment grade market for CMBS in Japan. "That tranche was sold to several investors and it was not difficult to sell it," the official said. "There is now a willingness to go down the credit curve as investors are keen on the pick-up."
Other securitization pros confirmed that the deal was well received, saying that while Seibu has had to issue the deal to raise funds to pay its share of the losses of an affiliate, the company is highly profitable and is viewed favorably by Japanese analysts.
According to figures from Merrill Lynch, Japanese real estate-related securitization issuance in 2000 has reached over $7.5 billion so far this year, a massive increase on the $1.6 billion closed in 1999. Real estate has become the dominant asset class in Japan, comprising 50% of all Japanese asset-backed securitizations.
