In March, the state-owned Government Housing Loan Corp (GHLC) will launch a debut Ñ50 billion ($430 million) mortgage-backed deal and local market participants have been awaiting news of how the deal's arranger, Credit Suisse First Boston, will go about the structuring process.
In Japan, mortgages are typically guaranteed by a subsidiary of the lender, which in turn has first lien on any loans included in a securitization pool, rather than senior note holders. Because of this, an MBS market in Japan has been slow to develop, as it is difficult to perfect a transfer of assets, or true sale securitization.
To ensure that senior noteholders are protected, CSFB has come up with an innovative solution. Firstly, to take away default risk in the underlying pool, the loans can be replaced by newly originated loans with the same characteristics as the rest of the pool.
Additionally, after certain trigger events, such as non-payment of interest by the originator, or disruptive organizational changes within the GHLC, bondholders can exchange their notes for the original mortgage certificates. A source close to the deal describes this feature as a "very unique" to a Japanese MBS deal.
After examining the structure, Standard & Poor's has awarded a provisional triple-A rating to the one-tranche fixed rate deal. The notes will pay investors on a quarterly basis and will reach legal maturity in 2036.
The underlying assets - valued at Ñ55 billion - will consist of 2,831 residential mortgages originated by GHLC. The initial pool is made up of loans applied for between last April and June, and contracted before November 2000.
The average loan-to-value of the mortgages will be 78.5%, with an average debt-to-income of 18.95%. The loans must also have a seasoning of at least four months. Credit enhancement will come solely through over-collateralization on the bonds of 9.3%.
Which banks will underwrite the deal remains to be announced. Ten banks have applied for the mandate: CSFB, Daiwa Securities, Goldman Sachs, Lehman Brothers, Merrill Lynch, Mizuho, Morgan Stanley Dean Witter, Nomura, Salomon Smith Barney and Tokyo Mitsubishi.
Talk in the market suggests there will be at least three banks awarded underwriting duties. "From what I understand, there is talk of putting a group together to underwrite the deal," says a banker at one of the competing firms. "It's a big chunk, so it would be hard to place with only one lead manager."
This suggestion seemed to be confirmed by an official at GHLC. "We want to reach as many investors as possible, so if there are similar bids put in, it's likely there will be three or four managers chosen," he says.