Morgan Stanley closes largest Japanese ABS

Morgan Stanley gives investors an Aiful with a Ñ245 billion deal.

Morgan Stanley has closed the largest ever asset-backed securitization (ABS) to come out of Japan with a Ñ245 billion ($2.04 billion) deal for Aiful Corp, one of the country's major consumer loans companies.

The transaction, issued through the Life SPV (special purpose vehicle), securitizes a portfolio of around Ñ300 billion consumer assets originated by the now defunct Life Company, acquired by Aiful in March this year.

The Life deal has been widely anticipated in the market since then and it is no surprise that Morgan Stanley arranged the transaction given that that the bank also arranged a Ñ273 billion loan for Aiful to buy the assets in the first place.

Proceeds from the offering will be used by Aiful to pay off that loan.

The issue was split into four different tranches with average lives ranging from 2.3 years to 5.3 years. The deal was also rated by four different agencies - Standard & Poor's, Moody's, Fitch and local agency R&I. This is a first for the market and was probably done to boost the fragile confidence of Japanese investors at a time of domestic and international uncertainty.

The Ñ214.5 billion of A-class notes were rated triple-A by all four agencies. Additionally, the Ñ5.5 billion B notes were rated double-A, Ñ4.6 billion of C notes received a single-A rating, and the Ñ20.4 billion D tranche is rated triple-B.

Pricing ranges from 40 basis points over one-month Libor on the A-notes to 150 over on the triple-B paper.

An official at Morgan Stanley said that the investor response on the three subordinated tranches was excellent but the bank would have to wait before fully placing the triple-A piece.

"The deal was oversubscribed on the lower-rated paper with interest not only from local investors such as retail banks and insurance companies, but also Asian and European accounts, mostly mutual funds, which took up 10%" the official says. "We had good interest in the triple-A piece as well, but because of the huge size of the deal it's going to take a bit longer with the distribution."

Getting ratings from four agencies was not the only precedent set by the Life deal. It is also the first time that four different asset types - instrument loans, shopping card receivables, consumer loans and auto loans - have been included in the same transaction.

This was made possible by using a master trust structure, which adds flexibility because it allows different receivables - as long as the basic characteristics, such as the maturity of the loans, are the same - to be put into the SPV. In principal, this allows Aiful to launch more deals from the same vehicle if it wishes to do so in the future.

Although this is the first securitization-based acquisition financing to be completed in Japan, it is not the first time that the assets of a bankrupted company have been securitized.

Since late last year, securitization professionals in Japan were forecasting that consolidation in the financial sector would provide a boost in ABS issuance.

In August, JPMorgan completed a deal backed by the property assets of the bankrupt insurance company, Chiyoda Mutual Life.

Chiyoda went into liquidation in October 2000, part of a trend in the insurance sector that saw other big players such as Kyoei Life and Daihyaku Lie going the same way. Most of the assets were picked up by firms such as Shinsei Bank, the consumer credit company OREX and Manulife Century Life Insurance.

It is likely that rather than keep these assets, including loan portfolios and real estate, on the balance sheets, the new owners were looking to re-finance them through securitization.

In light of recent events, it is not known when we may see the next deal backed by distressed assets, but when sentiment improves more big issues such as the Life transaction can be expected from the Japanese ABS market.