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[non-NRSRO] Trust Beneficial Interest (202102) -- Moody's assigns provisional ratings to Trust Beneficial Interest (202102) backed by condominium investment loans

·18 min read

Rating Action: Moody's assigns provisional ratings to Trust Beneficial Interest (202102) backed by condominium investment loans

Global Credit Research - 12 Jan 2021

JPY70 billion in Debt Securities affected

Tokyo, January 12, 2021 -- Moody's SF Japan K.K. has assigned provisional ratings to Trust Beneficial Interest (202102) backed by condominium investment loans.

The complete rating action is as follows:

Transaction Name: Trust Beneficial Interest (202102)

Class, Issue Amount, Dividend Rate/Interest Rate, Rating

Class A Senior Beneficial Interests I, JPY50 billion, Floating, (P)Aaa (sf)

Tokkin ABL, JPY20 billion, Floating, (P)Aaa (sf)

Total Issue Amount: JPY70 billion

Closing Date: February 5, 2021

Final Maturity Date: November 30, 2057

Underlying Asset: Condominium investment loans

First Trustee/Second Trustee: The Norinchukin Trust & Banking Co., Ltd.

Arranger: The Norinchukin Trust & Banking Co., Ltd.

Credit Enhancement: The senior/subordinated structure and excess spread available.

Subordination: Approx. 15.1%

RATINGS RATIONALE

The Seller entrusts a pool of its condominium investment loans, all related rights and cash to the First Trustee. In turn, the Seller receives the Class A Senior Beneficial Interests I, the Class A Senior Beneficial Interests II (collectively, "Class A Senior Beneficial Interests"), the Class B Beneficial Interests, and the Seller's Beneficial Interests.

Entrustment of the condominium investment loans is perfected against third parties via registration pursuant to the Perfection Law. Perfection against obligors of the receivables is not made unless certain events occur.

The Seller has established first security interests (mortgages) on the collateral properties. The First Trustee holds the security interests in accordance with the entrustment of the loans. Transfer of the ownership of the security interests is not perfected by registration unless certain events occur.

The condominium investment loans are guaranteed by a guarantor. The guarantor makes the payment for defaulted loans on behalf of obligors for the benefit of the First Trustee. Such payments are first paid to the Servicer and then is transferred to the First Trustee according to the servicing agreement.

The Seller's Beneficial Interests are backed by a cash reserve, which is available to cover liquidity risk, commingling risk, set-off risk, registration expenses for the transfer of the ownership of the security interest and fees relating to the start of back-up servicer operations and so forth.

The Seller retains the Class B Beneficial Interests and the Seller's Beneficial Interests, and sells the Class A Senior Beneficial Interests I to beneficial interest investors and the Class A Senior Beneficial Interests II to the Second Trustee. The transfer of the Class A Senior Beneficial Interests is perfected against relevant obligors and third parties under Article 94 of Japan's Trust Law.

The Settlor entrusts cash to the Second Trustee and receives the Beneficial Interests. The Second Trustee receives limited recourse loans, the Tokkin ABL, from ABL investors. The proceeds are used to purchase the Class A Senior Beneficial Interests II.

The Seller acts as the initial servicer, under the Servicing Agreement with the First Trustee.

The transaction does not have a third-party Back-up Servicer in place that can take over actual servicing operations. However, the First Trustee has the obligation to appoint an eligible Back-up Servicer by entering into a new servicing agreement if any servicer replacement preparation events occur.

Principal redemption is made in a sequential manner. After the Class A Senior Beneficial Interests are fully redeemed, the Seller's Beneficial Interests and the Class B Beneficial Interests are then redeemed in this order. The Class A Senior Beneficial Interests I and the Class A Senior Beneficial Interests II are redeemed on a pari passu basis.

The dividend and principal collections of the Class A Senior Beneficial Interests II are allocated to the interest and principal payments on the Tokkin ABL.

Interest collections (after paying expenses and dividends) are transferred to the Principal Account up to the aggregate amount of the net loss of defaulted loans (net loss trapping mechanism).

If any accelerated amortization events occur, the dividends waterfall to the Seller's Beneficial Interests and the Class B Beneficial Interests are suspended, and any excess spread available is used to redeem the Class A Senior Beneficial Interests. Key accelerated amortization events include a servicer replacement event occurring and the accumulated default amount exceeding the trigger.

Although the interest types of the asset side and liability side are floating rate, their base interest rates are different. The rated notes are exposed to the basis risk where the spread between the two base interest rates is shrinking significantly which could lead to negative carry. The negative carry risk is mitigated by the credit enhancement provided by the senior/subordinated structure.

The ratings are based mainly on the credit quality of the receivables, the transaction structure, and the servicer's experience.

Moody's has not given any credit, in its rating analysis, to the guarantee on the condominium loans.

Having analyzed the obligors' attributes, the historical performance and industry trends, Moody's estimated an expected cumulative gross loss rate of 4.2%. Moody's also determined its portfolio Expected Loss (EL) of 1.5% and MILAN Credit Enhancement (CE) of 9.8%. In addition, Moody's used the portfolio EL and the MILAN CE to determine a probability loss distribution and conducted a cash flow analysis with multiple portfolio loss scenarios of the distribution.

Moody's assumes that, given the structure of the transaction as well as other factors, the risk of interruption to the cash flow from the assets in the event of the bankruptcy of the Seller or the First Trustee is sufficiently minimized to achieve the ratings assigned.

Moody's considers the Seller sufficiently capable of servicing the pool, having taken into account the business experience and the servicing operations of the Seller.

The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" (Japanese) published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1248144. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the ratings:

The primary factor that could lead to a downgrade of the ratings is worse performance of the underlying assets than Moody's expected.

Moody's has also conducted the sensitivity analysis below which provides the number of notches by which the model-indicated output of the deal would have varied if different assumptions had been made as to certain key model parameters. The analysis assumes that the deal has not aged.

If the expected cumulative gross loss rate and the MILAN CE were changed from 4.2%/9.8% to 6.3%/14.7% and 8.4%/19.6% and other assumptions remained unchanged, the model-indicated output of the Class A Senior Beneficial Interests I and the Tokkin ABL would change by 1 and 1 notch respectively.

The analysis results are model-indicated outputs, which are one of the many quantitative and qualitative factors considered by rating committees in determining actual ratings. This analysis does not intend to measure how the rating of the deal might migrate over time, but rather, how the initial model-indicated output of the deal might have differed if certain key model parameters had been varied.

The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of consumer assets from the current weak Japanese economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Moody's SF Japan K.K. is a registered credit rating agency under the Financial Instrument and Exchange Act but not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore the credit ratings assigned by Moody's SF Japan K.K. are Registered Credit Ratings to the FSA, but are not NRSRO Credit Ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Shinichiro Kan VP - Senior Credit Officer Structured Finance Group Moody's SF Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4220 Client Service: 81 3 5408 4210 Yusuke Seki Associate Managing Director Structured Finance Group JOURNALISTS: 81 3 5408 4220 Client Service: 81 3 5408 4210 Releasing Office: Moody's SF Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4220 Client Service: 81 3 5408 4210

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