development and current issues of j apanese s ecuritization m arket bank of japan yoshitake hattori

Development and Current Issues of Development and Current Issues of J JAPANESEAPANESE S SECURITIZATIONECURITIZATION M MARKETARKET

Bank of Japan

Yoshitake Hattori

Financial Markets DepartmentBank of Japan

2

Contents

1. Overview of Securitization

2. Overview of Japanese Securitization Market

3. The background for the development of Japanese Securitization Market

4. Issues on Japanese Securitization Market

5. Bank of Japan’s Initiatives to Date


3

1. Overview of Securitization


4

investor

(Origination) 　　　　　　　（ Primary Market ）（ Secondary Market ）

Using credit enhancement

by the “senior-subordinated”

structure

Simplifying risk analysis

by isolating assets

Reducing risk bydiversification ofcollateral assets

Adding liquidity by issuance of securities

transfer

issuance ofsecurities

Securities

SPV

Asset

originator Asset

• Basic Structure and Effects of Securitization

investor

intermediary


5

• Major Types of Securitization Products

[Underlying Assets] [Products]

Equipment Lease, Credit Card Receivables, Consumer Loans

Receivables

Corporate Bonds

Residential Mortgage Loans

Ownership of Real Estate

Commercial Mortgage Loans

ABS

ABCP

CLO

CBO

RMBS

CMBS

REIT

Corporate Loans


6

• Examples of Securitization Procedure ① ABS ② ABCP Program (Multi Seller Type)

Investors

SPV(Special Purpose Vehicle)

Lessor (Leasing Company)

Lessee A

Lessee B Lessee C

Lessee D

Issuance of ABS

Principal + interestInvestment

Lease Receivables

Lease payment

Investors

SPV(Special Purpose Vehicle)

Issuance of ABCP

Principal + interest

Investment

Obligee A

Obligor a) Obligor z)

Obligee Z

ReceivablesAssignment of Receivables

Assignment of Receivables

Transfer payment

Transfer payment

Payments


7

Characteristics of securitization market•Provide new methods of

financing/investment•Unbundle and/or mitigate credit risks•Enhance liquidity by issuance of securities

• Price discovery function for credit risks

• New business line for the financial institutions

• Multiple routes to intermediate credit flows

• Significance of the Securitization Market

Strengthen the financial infrastructure to support economy


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2. Overview of the Japanese Securitization Market


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• The Comparison with Other Credit Markets(Trillion Yen)

2000 2001 2002 2003 2004 US(04)*1 Europe(04) *1､2

Credit Derivatives (Amount Outstanding) 1.5 2.3 1.7 2.6 3.0

(0.6)*3

243.6

(20.0) N.A.

ABS (Amount Issued) 2.8 3.3 4.7 3.9 5.1

(1.0)

239.1

(19.6)

34.3

(3.2)

CDO 0.1 0.2 0.7 0.7 0.4

(0.1)

N.A.*4

3.6

(0.3)

Corporate Bonds (Amount Outstanding) 58.4 56.3 55.1 53.3 52.2

(10.3)

305.8

(25.1)

72.1

(6.7)

Syndicated Loans (Annual Flow) 8.0 9.7 10.9 14.2 15.4*5

(3.0)

139.9

(11.5)

90.4

(8.4)

Bank Loans (Amount Outstanding) 475.3 454.0 432.3 409.9 398.5

(78.9)

460.1

(37.8)

1,182.8

(110.4)

Nominal GDP(04) 505.2 1,217.8 1,071.5

(Notes)

*1:Figures are converted into Yen with the exchange rates as of the end of 2004 (1 US$ = 103.78JPY, 1euro = 140.96JPY).

*2:EU zone (ABS includes data of UK and Sweden, and Syndicated Loans include data of UK, Sweden, and Denmark).

*3:Figures in parenthesis are ratios to Nominal GDP.

*4: Amount Outstanding as of the end of 2004 is 27.5 Trillion Yen.

*5: Flows in 2004 is 19.7 trillion Yen based on BOJ’s data. Amount Outstanding is 25.1 trillion Yen at the end of 2004 based on BOJ’s data.

(Sources) Credit Derivatives: BOJ, Office of the Comptroller of the Currency Syndicated Loans: Thomson Financial, Loan Pricing Corporation

ABS, CDO: Deutsche Securities Limited, The Bond Market Association Bank Loans: BOJ, FRB, ECB

Corporate Bonds: BOJ, FRB, ECB


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• Size of Japanese Securitization MarketTotal ABS Issuance in Japan

Note: The above chart does not include products with short-term credit ratings.

Source: Deutsche Securities Limited, Japan Securities Dealers Association

(Jan-Sep)

0

2

4

6

8

10

12

14

94 95 96 97 98 99 00 01 02 03 04 050

2

4

6

8

10

12

14Others

ＣＤＯ

CMBS

RMBS

Credit Receivablesand ConsumerLoansEquipment Lease

Corporate Bonds

CY

0.03 0.03 0.1

1.01.2

2.32.8

3.3

4.7 3.9

5.16.2

Trillion Yen


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• Underlying Assets in Japanese Securitization Market

Source: Deutsche Securities Limited

(CY1998) (CY2004)

Credit Receivables and Consumer Loans

CMBS

CDO

Equipment Lease

RMBS

38% 30%

27% 5% 47%

7% 16% 15% 15%


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•Issuance Schemes in Japanese Securitization Market

Source: Deutsche Securities Limited

10%14%17%

25%

19%11%

9%13%

2%4%

11% 9%60%49%

25%

28%

10%22%25%

25%

5% 2% 6%

0%

20%

40%

60%

80%

100%

01 02 03 04

ABL etc.

Euro Bond

Benefi ci ary Certi fi cate

"Samurai " Pri vate Bond

Domesti c Pri vate Bond

Domesti c Publ i c Bond

(FY)


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3. The Background for Development in Japanese Securitization Market


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Before the Collapse of “Economic Bubble”

Bank-Based Financial System•Heavy Interdependence between Banks and Corporate Ent

erprises•Limited Channels for Corporate Finance•Limited Alternative to Stocks and SBs

• Financial Environment

What Has Promoted the Development of Japanese Securitization Market?


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The Collapse of “Economic Bubble”

Malfunctioning of Bank-Based Financial System

•Heavy Burdens of NPLs (Non Performing Loans) on Banks •Credit Crunch•Significant Drop in Stock Price


Index Stock Price

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

J an-89

J an-91

J an-93

J an-95

J an-97

J an-99

J an-01

J an-03

J an-05

(Yen)

Nikkei Average

Source: Bank of Japan


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Needs for ….

• Off-balance of NPL from B/S (Major Commercial Banks)• Various Channels of Funding (Corporate Enterprises)• Investment Alternatives to Stocks and SBs (Investors)

Securitization

After the Collapse of “Economic Bubble”


0.0

5.0

10.0

15.0

20.0

25.0

30.0

99 00 01 02 03 04

(Trillion Yen)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

NPLs (Left Scale) NPLs /Loan Outstanding

(Right Scale)

Non Performing Loans

Source: Bank of Japan


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• Progress in Legal Framework regarding Securitization (since 1993) -- Enabled originators to issue ABS more smoothly

< Major Laws regarding Securitization (Effective Year)>

• The Law for Regulating Business of

Specified Claims (Jun. 1993)

• SPC Law (Sep. 1998)

• Perfection Law (Oct. 1998)

• Amended SPC Law (Nov. 2000)


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4. Issues on Japanese Securitization Market


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Reducing the servicer riskdebtor

originator SPV

investor

investor

intermediary

Improvement of disclosure

Improvement of quantitative analysis

Reducing the cost of transfer of collateral assets

Improvement of flexibility of SPV

cash flow

issuance of securitiestransfer

establishing the framework toward more efficient origination and trading

establishing the framework toward more accurate and effective evaluation of securitized products

• Overview


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• Reduction of the Costs in Origination and Trading

(1) Reduction of cost regarding the transfer of underlying asset

[Issues] Clause to prohibit the assignment of a chose in action

(customary in some type of underlying asset) Difficulty to remove the potential defenses to

payment and set-off rights Cost and administration to perfect the transfer

[Possible solutions] Structuring (such as standardized contract terms of

underlying assets permitting the transfer ) Remove the negative reaction to asset transfers Modification of regulations/system

(2) Improvement of flexibility of SPV

[Issues] Plural issuances out of a single domestic SPC

[Possible solutions] Introduction of limited-recourse clause and the

improvement of collateralization of bonds

Enhancement of the usage of trust scheme Practices to improve the liquidity of trust certificates Regulatory treatments (such as characterizing the

certificates as securities, enhanced usage of SPT)

(3) Reduction of servicer risk

[Issues] Removal or reduction of commingling risk without

losing the cost effectiveness and the transfer of creditrisk

[Possible solutions] Introduction of segregated bank account for the

servicing

Smooth transition of servicing function Clarification of conditions to change the servicer,administrative preparation to transfer servicing duties


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Increasing liquidity is essential for the market to grow further

• Improvement of Disclosure - Why is it necessary?

Key factor is the improvement of the information disclosure (to increase

transparency)

(i) Enables proper pricing/evaluation; (ii) reduces the liquidity premium (funding cost); and (iii) diversifies the investment opportunities

Liquidity(Low) (High)

Uniqueness

(Strong)

(Weak)

Securitized Products

EquityCorporateBonds

Desirable Direction

Current Status

Trust Certificates

Private Issues

Public Issues

JGB

Loan


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• Improvement of Disclosure - What are the issues?

Increasing number of private issues (even the fact of issuance is undisclosed)

Investors have difficulties in obtaining prices of individual issues and/or

information necessary for evaluating quality of earnings or past performance

─ With regard to private issues and trust certificates, it is often difficult for third parties (other

than direct counterparties to the issue) to obtain information

─ Public issues do not always fulfill the investors’ requirement, due to the inflexibility of terms

to be disclosed and the complexity of disclosure format

Current market environment is deterring the incentive for the disclosure.

However, it takes time to solve these problems and the change of the market

environment does not necessarily encourage the disclosure. Therefore, it is

necessary to establish the incentive mechanism to encourage disclosures.


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5. Bank of Japan’s Initiatives to Date


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Bank of Japan’s Initiatives to Date　– What has BOJ done so far?

1999 Oct Started to accept asset-backed securities (ABSs) as eligible collateral for BOJ's credit

--- ABSs backed by leases credits, card credits, corporate bonds, and corporate loans

2002 Feb Started to accept asset-backed commercial paper (ABCP) as eligible collateral and aseligible asset for commercial paper (CP) purchasing operations under repurchaseagreements

Started to accept ABSs backed by mortgage loans and cash flows generated fromreal estate as eligible collateral

2003 Jan Started to accept ABCP guaranteed by the Bank's counterparty financial institutionsand their affiliates as eligible collateral

Mar Started to accept dematerialized ABCP as eligible collateral

Jun Started to accept dematerialized ABCP as eligible asset for commercial paper (CP)purchasing operations under repurchase agreements

Jul Started outright purchases of ABSs

Nov Held the first meeting of “Workshop on Securitization”

2004 Jan Amended the conditions for the outright purchases of ABSs

Apr Published the report of “Workshop on Securitization”

May Started to release “Survey on Securitization Market”

Oct Enabled the removal of prohibition-of-transfer clause


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• Outright Purchases of ABSs (since July, 2003)– Strengthen the transmission mechanism of monetary easing– Contribute to sound development of the ABS market, without

distorting market mechanism– The conditions were amended on January 2004.

Terms and conditionsTypes of eligible products to be purchased

• Publicly offered ABSs (including synthetic-type) and ABCPUnderlying Assets

• 50% or more of the underlying obligees must be small and medium-sized enterprises

Term• The purchase program shall be valid until end of March 2006

Upper limit of purchase• 1 trillion yen on outstanding basis


26

0

0.5

1

1.5

2

2.5

3

Aug Oct Dec Feb Apr J un Aug Oct Dec Feb Apr J un Aug

Amended the for condition for the outright purchase of ABS

Amount of the Outright Purchases of ABSs– The outstanding amount of the purchases remains relatively small,

compared to the upper limit on purchases (i.e., JPY 1 trillion). Demands from investors are so strong that securitized products are

smoothly issued in the market.

Market participants seem to have more confidence in securitization, after our announcement of the purchase of ABS.

Accumulated Amount (Sep 30, 2005)

ABCP: JPY 2.8 trillion

ABS: JPY 0.001trillion

Total: JPY 2.8 trillion

Outstanding Amount (Sep 30, 2005)

ABCP: JPY 62billion

ABS: JPY 0 billion

Total: JPY 62 billion

2003 2004 2005

Accumulated Amount of ABS Outright PurchaseTrillion Yen


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• The Workshop on Securitization

Securitization market in Japan has dramatically developed since 1990s

Required to identify the practical issues and to explore possible solutions in order for the market to proceed to the next stage of expansion

BOJ (Financial Markets Dept.) held “Workshop on Securitization,” acting as a secretariat

Principles in organizing the WorkshopDiscussion reflecting diverse viewpoints

－ wide range of participants (originators, arrangers, investors, intermediaries, analysts, rating agencies, lawyers, accountants, government officers and industrial associations, etc.)

Check the whole procedure from origination through issuance/distribution of products


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• Survey on Securitization Market

BOJ, as an unbiased public sector, launched the Survey on Securitization Market, prompted by the requests from Workshop participants (in May 2004)

The survey aims to improve the information infrastructure of the market at the developing stage, aside from the regulatory disclosures to provide investors protection.

The survey is a temporary measure until March 2006 (some private sector is expected to take over it after the expiry).

Supports by market participants are indispensable to make the survey workable

As the number of market players (voluntarily) participating in the survey increases, the survey becomes more significant. It is expected, as a result, more players utilize the survey as the source of information.


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• Standardized List and Model Formats for Information Disclosure

Standardized List for Information Disclosure： List up the terms necessary for risk assessment, pricing, and investment

decisions, clarifying the level of requirements, definition of each term, and points to consider in accordance with the current market practice

Model Formats for Information Disclosure： Model formats to be used to disclose information Intended to be customarily used as a disclosure model, through being

referred to henceforth and reviewed and revised in practice

Actually used for disclosure of SME-CBO issued by Japan Finance Corporation for Small and Medium Enterprise

[Sample of “Standardized List”]Term Level Definition, contents, points to consider

Issue size 1 ・ Amount of total issuance and size of each tranche… … …DelinquencyRatio

2 ・ Delinquency amount incurred in the period / Beginning balance ofprincipal (%, annualized)(on flow base)

・ Cumulative delinquency amount balance as of the end of the period/ Ending balance of principal (%)(on stock base)


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• Removal of Prohibition-of-Transfer Clause

Ø BOJ removed the prohibition-of-transfer clause in the qualified contracts where BOJ was a debtor in October 2004.

Intended as a solution to the issue of “cost reduction of origination”

─ Based on the opinion that the public sector should lead the initiatives to remove the negative image of financing through the transfer of assets

Ø In practice, BOJ enabled the transfer to SPC or qualified institutional investors for the contracts with the notional amount of 5 million yen or more under certain conditions.


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• The Way Forward

Ø The Workshop; has identified the current issues concerning Japan’s securitization

market and provided fundamental directions to solve them will serve as a milestone in promoting sound development of the

securitization market has successfully contributed to establish a basis for mutual trust and

cooperation among a wide rage of market participants

Ø BOJ also wishes that a wide range of market participants make further efforts to address problems in cooperation

BOJ continues to commit itself in supporting the ongoing endeavors

development and current issues of j apanese s ecuritization m arket bank of japan yoshitake hattori

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