Paribas recently issued Japan's biggest commercial mortgage backed-securitization to date, adding to the torrent of CMBS deals in the domestic market.

Originated by Japanese supermarket operator Mycal Corp., the 41 billion ($394 million) note issue is ultimately backed by rental income from a pool of 10 shopping malls located throughout Japan. The properties were first entrusted to Yasuda Trust & Banking, which sold three classes of trust certificates to an offshore SPC. That SPC funded the purchase with a non-recourse loan, a mezzanine bank loan, and an issue of preferred shares. A second offshore SPC, called New Shopping Centres Funding Corp., issued 41 billion of notes to fund the non-recourse loan to the borrowing SPC. Mycal will lease back and continue to occupy the malls.

The five-year bullet securities were priced at 2% and placed entirely in Japan, where investors showed a very positive response, said Shiro Uehara at Paribas in Tokyo. "There was strong demand for this and it was many times oversubscribed," he commented, adding that the 2% coupon offered a higher spread compared to other domestic asset-backed transactions. Investors also took comfort from the transaction's Aa1 rating by Moody's, which is higher than Mycal's current Ba3 rating, he added.

The CMBS is the first in Japan to use an outside asset management company, which will oversee management of the securitized properties. The new company, called AM Research and Report Corporation, will advise Mycal and Yasuda Trust on ways to re-finance the funds necessary to pay off the bonds at maturity, said Uehara. Normally that is done by the trust bank holding the assets, but Paribas wanted to remove that responsibility from Yasuda Trust to ensure objective re-investment advice, he added.

Meanwhile, the world's largest life insurer, Nippon Life Insurance, recently announced plans to raise 20 billion in its first commercial mortgage-backed securitization.

Nippon Life will entrust five office buildings to Toyo Trust & Banking, which will issue trust certificates with beneficiary interest claims in the trust to a bankruptcy-remote SPC, according to a firm spokesman. The SPC will issue two tranches of five-year, fixed-rate bonds and one tranche of preferred subscription certificates, all backed by rental income from the buildings in Tokyo and Osaka.

Nomura Securities, the arranger, will launch the CMBS in early October. It will be privately rated by Moody's and sold domestically. However, Nippon Life also plans to retain up to 50% of the preferred subscription certificates, the spokesman added.

Nippon Life is the latest among many Japanese financial institutions and property developers to turn to CMBS, which is expected to grow rapidly in Japan in the coming months (ASRI, 9/2/1999, p.2). Many city banks and insurance companies in Tokyo have already initiated their own property-backed deals, though most are believed to have been privately placed in the domestic market.

The declining value of Japanese commercial real estate which has been on a downward spiral since 1991 has caused illiquidity in the property market and worsened the bad-loan burden of firms holding real estate as collateral, forcing them to look at issuing CMBS as an alternative source of financing.

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