Japanese bad loan agency lines up NPL securitization

Mitsubishi Trust & Banking Corp. and Morgan Stanley mandated for Y100 billion issue.

Japan's Resolution and Collection Corp. (RCC), the government agency set up in 2000 to rid the country's banking system of non-performing loans (NPLs), is scheduled to launch its second securitization of distressed assets in October. RCC has selected Mitsubishi Trust & Banking Corp. and Morgan Stanley to arrange the deal.

At this stage, little information has emerged about the transaction apart from the lead managers; expected timing and that it will be for Y100 billion ($834.4 million). The detail that most market participants want to know is whether the transaction will be publicly offered.

RCC disappointed many with its first securitization, arranged by Goldman Sachs in February, by placing the deal privately rather than through a large public issue, which could have set a benchmark for the market, accessed a broader range of investors and paved the way for more NPL backed transactions in the future.

"If the NPL securitization market is to develop, it's up to the RCC to value the assets properly and provide benchmark deals, but it's hard at this point in time to determine whether they are ready to do that," comments one Tokyo-based structured finance analyst. "It is not clear whether they plan to disclose information to a wider information with the second deal.

"There are plans [by the government] that will make it easier for RCC to compete with foreign houses in buying up NPLs," he adds. "Securitization is definitely an option available to the RCC to dispose of these assets, but I don't see steady growth in the NPL securitization market unless there is a change in the originators' willingness to make the deals public."

Perhaps the fact that Morgan Stanley has been brought on board offers a clue that the RCC will go the public route this time. The bank has carved something of a niche for itself in NPL securitization globally and has already issued two Japanese non-performing real estate transactions through the International Credit Recovery Japan special purpose vehicle.

Both deals û a Y21 billion offering in 1999 and Y31 billion deal in August 2000 û managed to secure triple-A ratings from Fitch, Moody's and S&P and attracted interest from US and European investors as well as Japanese buyers. If the RCC is to make real headway in resolving Japan's NPL situation û estimated to be $1.3 trillion by Ernst & Young û and uses securitization as a major part of its strategy, access to global investors might make its task a little easier.

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