Japan's oldest and largest non-life insurer, Tokio Marine & Fire Insurance Co. Ltd., considers itself to be a pioneer in the domestic asset-backed market.

The firm was one of the first investors of collateralized loan and bond obligations in Japan, and since then has always been on the hunt for new assets classes, said Manabu Yukitomo, deputy manager of the firm's investment and structured finance group in Tokyo. "We are always interested in buying new products, and are one of the biggest buyers of domestic ABS," he said.

The firm is an active player both as an investor and guarantor. Yukitomo declined to reveal the size of the company's current ABS portfolio, but estimates that Tokio Marine has been involved in about 20% of all issues since last year, either as an investor or guarantor. The firm's ABS investment target for the current fiscal year ending March 31, 2000 is 100 billion ($980 million), though that is flexible and depends on other investment opportunities in the coming months, said Yukitomo.

That amount is only a fraction of Tokio Marine's total assets, which were 7.6 trillion at the end of March.

The firm has also made rapid headway in guaranteeing asset-backed transactions, a relatively new business in Japan. As of the end of March 1999, the firm had guarantees outstanding relating to financial transactions including asset-backed securities totaling 33.29 billion, according to its 1999 annual report. It is currently rated at triple-A by Standard & Poor's Ratings Services and Moody's Investor Services, the highest rating among Japanese financial institutions.

Keen On CDOs

Auto loan and equipment lease-backed issues dominate Tokio Marine's domestic ABS portfolio, but the firm is partial to collateralized debt obligations. "We understand that CBOs and CLOs give us a lot of merit, especially with respect to asset diversification and the lack of servicer risk," explained Yukitomo.

Going forward, the firm is interested in more residential mortgage-backed deals coming to market. "In the future we would like to buy residential MBS, but since the prepayment risk is higher, we will demand a higher spread," he said, adding that commercial mortgage-backed issues are purchased by a different group within the company.

Unlike most Japanese asset-backed investors who typically only consider fixed-rate bullet securities with maturities from three and five years, Tokio Marine's criteria are considerably more flexible.

The firm is open to buying either fixed or floating rate securities, and will buy pass-through issues if they come with a yield high enough to compensate for the trouble of manually booking the securities (like most Japanese institutional investors, the firm's back office systems are not equipped to handle pass-throughs). As for maturity, "we will consider paper longer than five years if the return is good, but most issues are not so long. We have no fixed rule," he said. Only investment grade securities are considered, he added.

One feature of asset-backed deals that Tokio Marine pays close attention to is the backup servicer. Backup servicing in securitizations was a novel concept in Japan until the collapse of Japan Leasing Corp. (JLC) last year served as a wake-up call to the asset-backed market.

"After JLC's bankruptcy, investors began to pay much more attention to the backup servicing. Because most receivables in Japan are collected through inter-bank automatic debiting system, some co-mingling loss is inevitable. Nevertheless, we repeatedly request arrangers to incorporate a good backup servicing program, which can efficiently work if an emergency occurs," he noted.

Still Needed: More Disclosure

Until recently, the slow pace of development in the domestic asset-backed market has often been blamed on Japan's buyside and their resistance to buying new products. But Yukitomo takes issue with that view, saying that issuers and arrangers often fail to provide enough information about a transaction in a timely manner.

"The lack of disclosure is a big problem. We are active in buying new products, but we often need more information from the issuer so we can calculate the capital charge, analyze the cashflow and other risks. If arrangers disclosed more information, maybe we would buy more," he said pointedly.

In addition, arrangers often place unreasonably short timetables on investors, sometimes giving them only a few days for analysis. "I am always asking arrangers to give me more time to analyze," he said.

Pricing of certain transactions is another problem for investors, said Yukitomo. For example, he cited recent CMBS transactions that are priced based on their expected maturity, yet rated according to the legal maturity. In such transactions, if the underlying real estate cannot be sold at par, or refinancing of the transaction fails to occur before the expected maturity, allowance for the principal redemption is given until the legal maturity, he said.

"We understand that such CMBS would have a kind of call option. But it was priced based on the shorter expected maturity, not the longer legal maturity, without a call premium. It's up to the market to decide whether this kind of pricing is fair or not, but we think investors should be compensated with such options," he commented.

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