Securitization has taken off in Japan over the past year, but not in a way that is satisfactory to all asset-backed players in Tokyo. That's because domestic issuance remains the cheapest option for Japanese issuers and domestic securities firms are therefore winning the bulk of the business.

"The market has really changed from a year or so ago," conceded one securitization head at a global bank in Tokyo. "The problem for us is that plain agency securitization is getting away from foreigners, and Japanese banks have taken it over. There are some foreign firms that are doing deals now, but this year will be a very telling year for most."

The trend towards domestic issuance has taken some bankers by surprise. Before the end of Japan's last fiscal year in March 1999, several domestic sellers had funded their transactions in the Euromarket.

Those deals were mostly arranged by global firms, which had prepared for such issues by beefing up their securitization presence in Japan months in advance. Not too long ago, most firms in Tokyo were still clamoring to hire more asset-backed bankers, lawyers, and ratings analysts (ASRI 6/28/99, p.3).

But a look at all publicly rated deals in the last year shows that domestic securities firms - notably Daiwa SB Capital Markets, IBJ Securities and Dai-Ichi Kangyo, among others - have clearly taken the lead. "In 1998, more than 18 billion ($170 million) out of 20 billion yen was sold cross-border. Last year, less than two billion yen got sold cross-border. No one thought it would be like this," the ABS head said

Whether foreign firms will start to scale back their Tokyo securitization staff remains to be seen, but the emphasis on domestic issuance has clearly left some global players re-thinking their strategy. "There's a lot of players who have built up some big teams recently and it's obvious there's going to be some consolidation as they find out they cannot sustain them. The way things are going doesn't bode well," admitted one asset-backed banker at another global firm.

Japanese Firms Happy, for Now

Though foreign firms may be missing out on the action, continued domestic issuance has at least benefited the market by deepening the pool of potential issuers and investors in Japan. The domestic investor base for ABS was relatively limited until a year ago and a major obstacle to the securitization market in its early stages.

But Japan's extremely low interest rates, combined with high liquidity in the domestic banking sector, have left investors starved for yield. In addition, straight bond issuance has declined sharply since last year, leaving investors with little choice but to snap up ABS.

"There is enormous demand for ABS in Japan and the number of investors is constantly expanding," said Alexander Batchvarov, head of international ABS research at Merrill Lynch in London. "ABS offers a good yield for triple-A and there is not a big supply of highly-rated sovereign paper or corporate bonds right now."

Not only has the number of investors shot up dramatically, but their level of understanding has also improved. "You could say that the number of investors has increased three times since a year ago," said one ABS banker at a Japanese firm in Tokyo. "For example, last year the average number of investors for one transaction would be seven; now it is as many as 25 or more for a regular lease or loan deal."

Continued demand for securitizations from domestic sellers and investors means that domestic asset-backed pros are keeping very busy these days. "Right now it is a pretty good time to be in [the] Japan securitization business," said another banker at a Japanese firm.

Overseas Issuance Will Return

Not all is lost for foreign players, however. Though the current market favors domestic securities firms, global players still have an advantage in structuring transactions which can be a hard sell to domestic investors or those which domestic arrangers lack the expertise to do.

"There's a lot of private transactions being done by foreign players which you don't hear about, involving real estate, consumer loans, CBOs and mortgages, all the assets that are not being touched by domestic houses," claimed one banking pro in Tokyo. "Just because they are not doing public deals does not mean they are not doing profitable business. There's no fees on the domestic deals anyway because the locals bid them all down."

That may be so, but some ABS pros still worry. "We're shifting our focus to where we can make money, such as asset classes that haven't yet been securitized and CBOs," said another ABS head at a global bank.

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