The Japanese market for collateralized loan obligations backed by sub-performing loans (SPL) is expected to continue to grow, writes Moody's Investors Service in a new report, "Japanese Distressed Assets CLOs Review and Outlook." Since 2003, Moody's has rated 11 CLOs backed by SPLs totaling over JPY160 billion. In many cases these loans are distressed corporate loans secured by mortgages on real estate. The growth is supported by an increase in overall trades in distressed loans.
Recently, some Japanese banks have been selling their distressed loans to reduce the number of bad loans in their portfolios and buyers, such as investment funds, have been using securitization as a source of debt capital, according to the report. Most of these distressed asset CLOs are backed by loans to entities that are in a revitalization process through bankruptcy procedures or those thought to be in danger of going bankrupt. "The underlying assets are almost all corporate loans to Japanese companies," explained Junichi Shimizu, a Moody's analyst in Tokyo who authored the report. Although foreign investors or equity sponsors may participate, he did not think Japanese CLOs are investing in U.S. deals.
Currently, Japanese loans to Japanese corporations tend not to be linked to credit risk, but Shimizu anticipates that changing. "We think in the near future the banks or lenders will be able to get a higher yield for a higher credit risk," he said.