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Securitization markets in Japan
This page updated regularly deals with securitization developments in Japan. If you have any news or development to contribute to this, please write to me.
Latest additions: This page was revised on 6th March 2001
Commercial property securitization in Japan:
A report based on DCR's commentary on office buildings securitisation in Japan was carried on this site - click here. The report also gives links to several other news items.
SPC law in Japan and the structure of securitization transactions:
One of the major landmarks in Japanese securitization was the passage, on September 1 1998, of the Law Concerning Liquidation of Specified Assets through a Special Purpose Company (the SPC Law). The SPC law removed several difficulties in the way of Japanese securitixzation, and primarily tax difficulties. It is, therefore, not surprising that the securitization activity in Japan has substantially picked after the SPC law.
The SPCs are also known as tukobetsu mokuteiki kaisha or TMKs
Prior to the passing of the SPC law, most of the Japansese securitization deals involved a complex set up of multiple SPVs. Usually, an originator will put up two SPVs in Cayman Islands. SPV 1 will basically be a lending intermediary and SPV 2 will be the issuer. SPV 2 issues bonds to investors and uses the whole of the proceeds to buy either bonds issued by SPV 1 or gives loans to SPV 1. SPV 1 opens a branch in Japan and makes a remittance of the funds so raised to its Japanese branch. The Japanese branch uses the proceeds to buy the assets of the originator.
The basic idea behind this convoluted structure was to avoid SPV 2 from being taken as domiciled in Japan and thus be liable to Japanese tax. SPV 1 has a branch in Japan and may thus be liable to Japanese income tax. The remittance that the Japan branch of SPV 1 makes to its Cayman Islands office will not be liable to withholding tax being an inter-branch remittance.
This inefficient and tedious exercise has now been made simpler under the new SPC law. Under the new law, the SPC may be located in Japan and will be liable to tax under Japan corporation tax, but then the dividends it distributes (remember that that is the only element that suffers double tax in securitization) is allowed as a tax deductible item subject to certain rules. One of the conditions is a minimum distribution of 90% of the distributable income.
The SPC as well as the securitization plan requires registration with the Financial Restructuring Committee.
Data till early 2000 indicate that since the introduction of the SPC Law, 37 companies have been registered as TMKs. Of these 17 relate to real estate projects.
Amendments in SPC law:
Amendments were proposed in May 2000 in the SPC law to remove some of the difficulties faced, based on experience. These amendments are to assume effect in December 2000. The note below, based on International Financial Law Review, June 2000 describes the main changes (TMK refers to SPC):
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