SF One Special Purpose Company has launched Sanwa Finance's first asset-backed security transaction.

The SPC launched A notes of about EURO170 million - backed by an unsecured consumer loan pool. It also launched class M notes worth the equivalent of about EURO8 billion. The deal is arranged and lead managed by Commerzbank Securities.

Sanwa Finance is a middle-tier consumer finance company that specializes in small loan lending. Iain Barbour at Commerzbank explained why Sanwa embarked on its first securitization in Euros. "We advised them that they would be able to access a wider investor base, which is a good idea for them as they want to put a program of issuance in place and have a good credit story to tell. There is a deeper market for them here." As of the end of 2001 Sanwa had a loan balance of about 109.1 billion (EURO937.3 million). It is the fourteenth largest consumer finance company in Japan.

The issue is expected to be placed mostly throughout Europe. "People here are looking through the surface of the economic situation in Japan at corporate assets," continued Barbour. "A lot of investors were unsure of Japan but now they have moved on from that. And eventually Japanese issuers will benefit from the tightening curve for Japanese risk assets over time in Europe."

Sanwa has entrusted 25.73 billion (EURO221 million) of unsecured fixed rate interest loan receivables to a trust. On the closing date the trust will borrow a 20 billion class A loan and a 1 billion class M loan from Commerz Securities.

The trust will repay a pre-funding loan from Commerzbank to fund the initial entrustment of the receivables and to provide a distribution to Sanwa Finance for the additional entrusted receivables. The class M loan funds the expenses incurred by the transaction and the cash reserves. SF Funding One bought the class A and M loans and funded the purchase by issuing the class A and M bonds. "Essentially, the Class M notes fund the costs of the transaction," said Barbour. "This is unique, and they also feature a controlled amortization rather than a natural amortization."

Moody's, Standard & Poor's and Fitch rated the class A notes:

Class A, average life 4.77 years, Aa2/AA/AA.

Class M, average life 1.56 years, A (Fitch private rating).

The Class A notes revolve for three years and then amortize, which is not a very common feature on Japanese securitizations, which generally feature soft bullets. "I think this will become more regular on Japanese securitizations in due course, but on cross border issues in particular," said Barbour. "Furthermore, the structure employs several features designed to protect investors against any sudden deterioration in the collateral quality"

A number of features provide the issue with credit enhancement. These include overcollateralization of the A notes by 26.6%, providing an initial amount of about 5.32 billion to cover credit and commingling risk. There is also a liquidity reserve worth about 477 million or four months of senior costs, depending on which is greater. And certain pool performance events will trigger the trapping of excess spread.

In December 2001 Clare SPC closed a consumer finance transaction that featured a euro tranche and a U.S. dollar tranche, as well as a yen tranche. This transaction also had an amortizing structure. And there should be more Euro denominated assets. "There is latent demand for these in Europe, where a huge amount of interest has been shown in the Japanese market," said Barbour. "People want Japanese risk but without exposure to Japan Inc. And they have a good perception of the Japanese consumer, and have seen the way in which the Japanese consumer finance sector has been resilient." Clare is expected to have closed its second securitization in March, which will be the U.S dollar equivalent of 20 billon around U.S.$150 million - and sold into the Euro market.

Barbour added that Japanese issuers are also interested in diversifying their sources of funding and want to counter the negative perception of Japanese companies. "I think the increase in euro-denominated issues will start to flow this year," he said. The consumer finance companies outside the top ten are now coming to market and there are many more mid size ones like Sanwa who could come to market."

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