Japan CDOs of ABS set for growth

With spreads on Japanese investment-grade credits at all-time lows, a growing number of arrangers are looking to issue collateralised debt obligations (CDOs) backed by structured finance securities. The first such deal, a ¥70 billion ($591 million) transaction referenced to a semi-managed portfolio of structured finance transactions, was launched by Sumitomo Trust & Banking (STB) in June.

Called Dawning Global Asset Funding One Limited, the transaction consists of Japanese, US and European asset-backed securities, CDOs, residential mortgage-backed securities and commercial mortgage-backed securities. The structure comprises four tranches of notes, maturing in 2006: a ¥52.2 billion super-senior tranche of guarantee agreement obligations, rated AAA by Moody’s Investors Service; a ¥11.9 billion tranche of asset-backed commercial paper, rated prime–1; a ¥4.9 billion mezzanine tranche, rated A3; and a ¥700 million tranche of subordinated debt that was not rated.

All senior tranches of the deal have been placed privately among Japanese institutional investors, says Jiro Sekino, senior manager in STB’s global credit and investment management department. “The main purpose of the deal is to distribute investment items to Japanese clients that have quite good relationships with Sumitomo Trust in Japan,” he says.

And with spreads on Japanese investment-grade credits at record lows, both arrangers and investors are keen to participate in more structured finance -backed deals. The problem, however, is a shortage of underlying asset-backed securities in the Japanese market, says Keiko Sawada-Kurasaki, senior vice-president in the structured finance group at Moody’s Investors Service in Tokyo. “There are so many people who want to create these types of transactions, but the underlying assets are not really sufficient [to do more deals] yet,” she says. “But the investors are looking for it, the arrangers are also looking for it, so once the volumes of the underlying assets come up, we should certainly see many of these types of transactions coming.”

Meanwhile, the ratings agency rated only three CDO transactions in second-quarter 2003 worth about ¥180 billion ($1.5 billion). While the total ¥3.20 trillion in issuance volume for the first half of the year is slightly higher than last year’s ¥3.14 trillion, most of the volume was generated by the surge in balance-sheet CLO transactions ahead of the Japanese financial year-end. During the six months to June 30, Moody’s did not rate any arbitrage transactions.

Nonetheless, despite the tight spreads, some issuers are still structuring arbitrage deals for Japanese investors. In mid-July, Tokyo-based Daiwa Securities SMBC launched its first managed synthetic CDO, the second managed deal to be issued in the Japanese market. Called Zest II, the transaction is referenced to a portfolio of 100 Japanese credits worth ¥30 billion. The structure comprises ¥1.2 billion of Class A1 fixed-rate notes rated AAA by a Japanese rating agency, Ratings & Investment (R&I); ¥1.2 billion of Class A2 floating rate notes rated AA-; ¥1.2 billion of Class B fixed-rate notes rated A+; ¥600 million of Class C fixed-rate notes rated BBB-; and a ¥1.2 billion subordinated portion that was not rated. Daiwa Asset Management is the adviser for the management of the underlying portfolio.

BNP Paribas launched Japan’s first managed synthetic CDO in February, with Japanese firm Daiichi Life-IBJ Asset Management acting as portfolio manager. Recently, the French bank closed the eleventh and twelfth series of its Serena Finance static synthetic CDO programme in July and August respectively. Thebank is also looking to close Serena Finance 13 this month. SF, NS