Japan CMBS is Going Through the Roof


The number of commercial mortgage-backed securitizations in Japan is expected to surge in the coming months, further fueling a sharp increase in domestic asset-backed issuance that began this summer.

Total volume of ABS issuance is expected to exceed 1 trillion ($9.5 billion) by the end of March 2000, which marks Japan's next fiscal year-end, according to business daily Nihon Keizai Shimbun. From April to August, public ABS issues reached 470 billion, roughly 20% up over a year earlier and equivalent to 15% of straight bond issuance in the same five months, the newspaper added.

The recent upswing in ABS activity is due to corporates trying to obtain funding before Japan's half-fiscal year ends this month, noted Frederic Drevon, managing director of Asia Pacific structured finance at Moody's in Hong Kong. "This is a typical pattern we see year after year. There is also continued support from the investor community for ABS. We expect Y2K to have a small incidence on overall activity," he added.

Real estate-backed securitization will increasingly account for future ABS issuance, market pros expect. After rating Japan's first CMBS in February, Moody's expects to rate at least one CMBS deal per month from now until the end of the year, noted Drevon. Standard & Poor's, which has lagged behind Moody's in rating Japanese CMBS due to more conservative criteria, said it expects to rate up to five CMBS deals by year-end, though most of them will be private.

"There are several securitizations going on now, and several more in the planning stage," confirmed Kanji Matsushita, a partner specializing in real estate at Showa Ota Ernst & Young in Tokyo, which is now consulting on two CMBS deals originated by real estate developers. "CMBS is still not taking off as much as everyone would like, but that is slowly changing," he added.

Most CMBS deals completed so far have been private, added Yassumasa Kai, a structured finance banker at Daiwa SB Capital Markets. "Tokyo landlords don't want to disclose information about rents, so most transactions have been privately placed with investors," he explained. Still, "the market is developing. A year ago there were just one or two transactions, but now there are many more that have actually closed," he agreed.

Investor demand is one factor spurring CMBS issuance. Real estate-backed deals offer greater spreads over other types of asset-backeds and straight corporate bonds, and are increasingly drawing the attention of investors deterred by record-low interest rates in Japan. "The yield on CMBS is pretty good in Japan. One private deal we worked on had a coupon of about 4.8%, which is quite high by Japanese standards," commented Matsushita.