More on this site and others 
on NPL securitisation

Recent additions

In our recent news releases, we have reported about securitization plans of Malaysian Danaharta, China's Huarong and Japan's Resolution and Collection Corp – see news page for May 2001.

There are three growth industries in Japan: funerals, insolvency and securitization.

Dominic Jones, in an article in Asset Finance International Nov., 1998

Recent securitization activity in several countries, including Japan, Korea and Italy, is getting boost from a strange application: securitization of non-performing loans. The most crucial question in securitization of non-performing loans is:does a bad apple, when sliced, become a good apple?

Historically, the World's first securitization of non-performing loans could be said to be Resolution Trust Corporation's "N" series program of the 1980s. The RTC was essentially formed to market dud commercial mortgages of savings and loans associations in the USA, which were bought at a deep discount and securitised in the market.

During the 1990s, the problem of non-performing loans with banks became particularly acute [in 1997, Japanese banks had an estimated USD 1 trillion in nonperforming assets], and with securitization technlogy with structuring options finding increased acceptability, bankers world-over have been looking at financial restructuring options through securitization.

It was not until late 1999 that securitization of non-performing loans became a reality. On 25th November, 1999, Morgan Stanley Dean Witter (MSDW) launched and priced a JPY 21.0 billion issue of floating rate structured notes for an SPV called International Credit Recovery – Japan One Ltd., a Cayman Islands-domiciled company [click here for the news report on our site] . This was the first time a capital markets solution had been applied to the problem of non-and-sub-performing loans. The MSDW deal was backed by non-performing loans backed on Japanese real estate, a total of 700 real estate assets of various types located throughout Japan. MSDW had been buying these loans over time.

MSDW claims to have securitized non-performing loans in US and European markets as well. There have been quite a few securitizations of non-performing assets in Italy – click here for news item on the issue; there are more news items on non-performing loans here.

More recently, Korean financial sector restructuring agency KAMCO came out with the first case of securitization of non-performing loans in Asia, minus Japan – click here for the news item.

How does it actually happen: The real miracle that securitization does to non-performing loans is not to turn bad into good. Therefore, turning back to the question with which we started – it is not that the bad apple becomes a good apple when sliced, but that the good portion of the bad apple is sliced and given to outsiders, while the bad part is retained by the originator or other enhancers. Most non-performing loans securitizations have been supported by substantial over-collaralization or subordinated interests retained by the originating banks. Most of the Italian securitizations, for example, are credit-enhanced by a substantial extent of subordinated notes which are retained by the originator.

In case of the Korean non-performing loan securitization, it is the put option with the Korea Development Bank that enhances the acceptability of the bonds.