Resecuritisation set for rapid growth in Japan, says Moody's

Resecuritisation deals - collateralised loan obligations (CLOs) backed by structured finance securities - are likely to grow in Japan, according to a report issued this week by Moody’s Investors Service.

The first such deal, called Dawning Global Asset Funding One Limited, was launched in June by Sumitomo Trust & Banking Co. The deal, worth ¥70 billion ($583 million), was semi-managed by Sumitomo Trust and Banking and referenced on Japanese, US and European asset-backed securities, collateralised debt obligations (CDOs), residential mortgage-backed securities and commercial mortgage-backed securities.

Moody’s attributed the potential growth to demand from investors for portfolios of diversified structured products, a growing need for resecuritisation of mezzanine and subordinated tranches of structured securities, and tight credit spreads. “When credit spreads are tight – as is currently the case in Japan – then it is a good time to issue this type of CLO deal [those that allow for substitutions of reference obligations] as the spread later widens,” Moody’s said in the report.

Moody’s added that it only rated three CDO transactions in the second quarter of the year, worth ¥180 billion ($1.5 billion). Among them were primary CLOs issued by Sumitomo Mitsui Banking Corporation, SMBC CLO II, and The Bank of Tokyo-Mitsubishi, BTM Synthetic CLO. The deals were primary CLOs because “the banks had originally extended the loans with the intention of securitising them”, Moody’s explained.

Looking at the first half of the year, Moody’s said it rated eight synthetic balance sheet transactions and four cashflow balance sheet transactions. The agency rated no arbitrage transaction in the six months to June 30. The total volume of structured finance securities in the first half of the year was about ¥3.20 trillion ($26.7 billion), slightly higher than last year’s ¥3.14 trillion ($26.2 billion).