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.
More on this site and elsewhere:
Latest additions: This page was revised on 6th March 2001
Japan, a late starter in securitization, has made impressive strides over the last few years. The rate of growth in 1998 and 1999 was close to 100%. In 1999, the securitization volume in Japan stood at USD 23.2 billion, which compares with USD 12.5 billion in 1998. A report by Moody's says that the market is expected to grow 30% in year 2000. Much of the new issuance in 1998 was comprised of collateralized loan obligations (CBOs) and mature assets such as vehicle loans and equipment leases. Conversely, issuance in 1999 should feature a variety of new issuers and asset types including commercial real estate, residential mortgage loans, small business loans, promissory notes, and unsecured consumer loans. In 2000, a trend that cannot be missed is increasing number of securitizations involving commercial property and non-performing assets. Morgan Stanley Dean Witter did two interesting securitizations involving non-performing loans acquired from Japanese banks and both got good reception in the market – see news report here.
In August 2000, Japanese department store Seibu did the largest CMBS transaction so far – see news report on our site.
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):
The principal changes to the SPC Law arising as a result of the proposed amendments are as follows:
- the limitation on assets will be lifted so that a TM K can purchase assets of any type;
- the minimum capital required for a TMK with be reduced from Y3,000,000 ($28,000) to Y100,000;
- the current registration system will be replaced by a notification system, and the FRC will be required to accept a notification if all of the necessary information is provided;
- More flexibility will be allowed in the operation of the TMK by permitting it to avoid mentioning the securitization plan in the Article of Association of the TMK thus allowing TMKs to be formed before the plan is finalised; the asset securitization plan may be amended by a special resolution of TMK members; minority TMK members will be able to require the TMK to repurchase their interests if they disagree with a resolution to amend a securitization plan; the TMK will be able to distribute income arising from partial asset sales and depreciation to TMK members; the issue of non-voting preference shares will be allowed; the issue of convertible bonds and bonds with warrants will be allowed; and the TMK will be permitted to borrow to fund the purchase of assets.
- The amended SPC Law will also allow TMK's to be established as orphan companies by allowing the nominal ordinary voting share capital of a TMK to be held by a trust bank on trust for the holders of the asset backed securities issued by the TMK Where such a structure is adopted, neither the trustor (usually the originator) nor the trustee may term in ate the trust; and the trustor is prohibited from giving instructions to the trustee as to the voting of the shares.The purpose of these changes is to allow the creation of domestic structures that should be treated as being off-balance sheet to the originator and also bankruptcy remote with respect to the originator.