Transcript High yield Bond Market Future in Japan

Future of High Yield Bond Market
in Japan
13/6/2001
Rating and Information Investment Inc.(R&I)
Structured Finance Rating Dept.
Senior Analyst
Ichinori Kitahara
[email protected]
Finance Intermediation in Japan
Debt Market
main funding source---indirect finance
Bank Loan---About 450 trillion yen
Influenced by BIS regulations.
Bond Market
Mainly Japanese Government Bond
Corporate Bond Market is relatively small
Stock Market
Raising equity is influenced by the state of
Stock Market
Cross holding of equity special to Japan is
coming to an end (due to focus on fund
efficiency)
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Interest Structure in Japan(Return)
Distortion of Yield Curve Structure
Low Spread Loan by Government Sponsored
Enterprise
prime-rate level
Commercial Banks ---Similar low rate due to
increased competition
prime-rate level or a little spread over prime-rate
Consumer Loan, Small Sized Business
Company Loan
nearly 30% (highest allowed under ‘the Acceptance
of Contribution Money Deposits and Interest
Law’(the ‘Shu-sshi-ho’)
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Risk-Return Profile in Japan (Image)
30.00%
LOAN (1YEAR)
BOND（1YEAR)
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
AAA
AA
A
BBB
BB
B
CCC+
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R&I Default Ratio (Credit Cost)
5.00%
4.50%
Credit Risk Ratio
Broad-Definiton Default Ratio
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
AAA
AA
A
BBB
EQUAL TO OR BELOW
BB
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Current Japanese Corporate Bond Market
Market Size
Corporate Bond---About 50 trillion yen
Issued by only Investment Grade Issuers
Current Issue (Fiscal 2000)
Corporate Bonds (excluding Bank Issues)
About 5.5 trillion yen
Asset Backed Securities
About 2.7 trillion yen
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R&I Rating Distribution
 As of 31/3/2001
120
106
100
90
86
81
85
80
68
60
46
40
33
25
20
19
18
16
9
0
8
6
0
3
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Corporate Bonds by Industry
/Current Issue
10 Billion Yen
120,000
Manufacture
Non Manufacture
Non Bank etc.
Bank
Utilities
100,000
80,000
24,130
0
7,260
18,280
18,110
28,130
60,000
10,300
11,080
40,000
20,814
11,262
45,014
25,625
14,125
20,000
12,570
0
fiscal 1998
fiscal 1999
12,060
fiscal 2000
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Corporate Bond / Fiscal 2000
Issuance with R&I Ratings
Equal to or Below BBB
5%
AAA
31%
A
32%
AA
32%
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High Yield Bond Market in Japan
Fallen Angel
Construction Company, Real Estate Company,
Whole Sale Company, Retailer etc.
Private Issuance---Non rating
Consumer Finance
Medium Sized Company
A few CB issue
6/2001 Sega Corp. Issue CB---Rating BB+
Underlying Asset for Asset Backed Security
Primary CBO (Collateralized Bond Obligation)
CLO (Small and Medium Sized Company Loan)
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Main Obstruction
Japanese Banking System
Over Banking
Competition
Advantage of Loan over Bond
maturity
covenants
amortization
collateral
interest
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Arranger Issues
Pricing System--- fair pricing &
implementation of indication price
Default study on bankrupt corporate
bonds
Distressed Bond Market
Introduction of Index
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Investor Issues
Investment Stance
Life Insurance Company
Pension Fund
Mutual Fund
--->Expectation for Appearance of High Risk
tolerable Investors
Introducing Portfolio Theory
Diversification of industry, maturity, credit rating, etc.
Risk Return Relationship
Inspection of FSA
Settlement Reform
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Issuer Side Issues
Incentive of issuing bonds
maturity
amortization
collateral
Acknowledgement of its own Credit Risk
Disclosure
---> Unfortunately, Bank loans have more
advantages compared to issuing high
yield bonds
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Scenario for change
 M&A in Banking Sector---knocked down to Big-4 group
need to transfer their concentration of the particular corporate
exposure
 Departure from excess investment in Japanese
Government Bonds
Development of Credit Risk Analysis
 Demand for Fixed Income Products, not equity, in an
Aging Society like Japan
 Development of Non-Performing Loan Market
 Introducing Mark to The Market Accounting to Loans
 Change in perception
Risk-Return Relationship Between the Bank and Borrower side
 Development of Securitization market will increase RiskReturn Reward recognition by its market participants
 --->High Yield Bond Market will grow
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Example 1 / Primary CBO
2000.4 Ensemble IV Ltd.
Transaction Amount 95.5 billion yen
Senior Notes
Senior Mezzanine Notes
Mezzanine Notes
Junior Mezzanine Notes
Subordinated Notes
67,500 mm
6,500 mm
3,500 mm
1,000 mm
17,000 mm
Credit ratings of Underlying Bonds
A
zone
BBB zone
BB zone
N.R.
BOND
2,000 mm
32,000 mm
8,500 mm
53,000 mm
Ltd.
Ensemble IV
AAA
A
BBB
BBBN.R.
Subordinated
Mezzanine
Senior
Chase etc.
QSPV Limited
FA/PPA
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Primary CBO Issued Amount
12 transactions 656.1 billion yen
Senior Notes(AAA)
Mezzanine Notes
Subordinated Notes
434 bn
Subordination 33.85%
82.5 bn Subordination 21.28%
139.6 bn
Underlying Bond Rating*
AA zone
A
zone
BBB zone
BB zone
N.R.
5,000 mm
95,500 mm
258,500 mm
32,000 mm
265,100 mm
0.76％
14.56％
37.40％
4.88％
40.41％
*Classification of ratings are at commencing
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Example 2 / Tokyo Metropolitan
CLO 2
 ISSUE AMOUNT:
32,484 million yen
 ISSUE DATE:
Mar 28, 2001
 REDEMPTION DATE: 1-A,1-B: May 10, 2004
1-C: Nov 10, 2004
1-D: six-monthly pass-through;final redemption Nov 10, 2004
 REDEMPTION METHOD: Lump-sum Redemption
 BACKING ASSETS: Trust Certificates backed by loan claims guaranteed by the







Credit Guarantee Corporation of Tokyo whose consignor is the originators
BOND MANAGEMENT AGENT: The Tokai Bank, The Sanwa Bank
JOINT TRUSTEES: The Toyo Trust and Banking Co, The Tokai Trust and Banking Co.
ORIGINATOR/SERVICER:12 commercial bank,etc
SUBORDINATED LOAN PROVIDER: The Tokai Bank, The Sanwa Bank
SUBORDINATED LOAN AMOUNT: 600 million yen (about 1.85% of the
issue amount)
AMOUNT RATING COUPON CREDIT ENHANCEMENT
1-A 17,200 AAA 0.52%

1-B

1-C

1-D
A sum equivalent to 1-B, 1-C and 1-D
(subordinated amount: 47%); cash reserve
4,800 A
0.74% A sum equivalent to 1-C and 1-D
(subordinated amount: 32%); cash reserve
5,084 AA+ 0.55% Guarantees of the loan claims by the Credit
Guarantee Corporation of Tokyo;cash reserve
5,400 AA+ 0.66% Guarantees of the loan claims by the Credit
Guarantee Corporation of Tokyo;cash reserve
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Tokyo Metropolitan CLO 2
Tokai Bank
Sanwa Bank
CGCT
QSPV
Guarantee
1-A Note
Subordinated Loan
1-B Note
Loan
Obligor
BANKS(Originator
/Servicer)
SPC
SPC
Tokyo
HQ
1-C Note
Transfer Trust Certificate
Caluculation Agent
Trust
Trust Certificate
Agent
The Toyo Trust
The Tokai Trust
Tokai Bank
1-D Note
Managing
The
Toyo Trust
Trustee
Tokai Bank
Sanwa Bank
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Tokyo Metropolitan CLO 2
 1) Evaluation regarding Bonds 1-A and 1-B
 a) Senior/Subordinated structure---analysis based on historical data
submitted by the Credit Guarantee Corporation of Tokyo.
 b) The guaranteed loan claims ---The backing loan claims are to smalland medium-scale businesses.
The portfolio is about 32.5 billion yen, with around 925 participants. The
maximum loan amount per borrower is 50 million yen.
 2) Evaluation regarding Bonds 1-C and 1-D
 The creditworthiness of Bonds 1-C and 1-D depends on the guarantee
from the Credit Guarantee Corporation of Tokyo.
Japan Small and Medium Enterprise Corp. will pay insurance to the Credit
Guarantee Corporation of Tokyo in line with the guaranteed amount of
the guaranteed loan claims, and the Tokyo Metropolitan Government will
furnish a subsidy under a loss subsidy contract.
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