A good RMBS result

The first securitisation of residential mortgages by a public Japanese agency is judged a success in Tokyo’s financial markets. But it was helped by a timely and fortuitous policy change on March 19 by the Bank of Japan (BoJ), which effectively meant a return to zero interest on the key overnight money market rate. When the deal for ¥50 billion ($403 million) of bonds, backed by Government Home Loan Corporation (GHLC) residential mortgages, closed on March 22, it was fully sold, according to Credit Suisse First Boston (CSFB), one of the joint lead underwriters.

Investors lined up for the GHLC residential mortgage deal

The deal was regarded as a critical test of both the investor appetite for residential mortgage-backed paper and the ability of Japanese state agencies (known as zaitokikansai) to obtain funding from the capital markets rather than through the government budget. As a result of a recent government policy change, some 20 state agencies will now have to fund themselves through the markets.
It is also hoped that a successful GHLC issue will give a big boost to the development of a mortgage-backed securities market, along the lines of the one created in the US around the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). The GHLC issue, which is expected to be the first of four ¥50 billion offerings this year, has closely followed the US model, according to Simon Maru, Tokyo head of debt capital markets at CSFB, which underwrote the transaction together with Goldman Sachs Securities and Sanwa Securities. There have been a handful of residential mortgage securitisations from private lenders since the market was introduced in 1999, but it has developed more slowly than the commercial mortgage-backed sector. Most important now, says Maru, is for the investment banks to create an active secondary market in residential mortgage-backed securities (RMBS).
The GHLC’s 35-year amortising bonds carry a 1.75% fixed coupon and were issued at par. Initial investor response had been muted. But the BoJ’s package of measures, which involve injecting increased liquidity into the Japanese economy (and a presumed consequent drop in interest rates to zero), brought a late surge in demand for the pioneering bond issue. Soon after the deal closed, the bonds were trading at 100.34% to 100.41%. Underwriters say the triple-A rated bonds were bought by major life insurance companies, city banks and regional and savings banks. “Because this was an important trial issue, we roadshowed from Hokkaido to Kyushu [the most southern and northern of Japan’s five main islands],” says Maru.
The deal was 9.3% over-collateralised on a pool of ¥55.126 billion in mortgages. To take into account prepayment risk on the underlying mortgages, the GHLC deal assumes a 3% prepayment rate and an average life of 12.6 years for the underlying pool of mortgages. But to build in some leeway, the corporation has a call option to retire its bonds after 30 years.
Of the 20 state agencies that must now fund in the markets, only GHLC and the Japan Finance Corporation for Municipal Enterprises (JFM) are able to use the securitisation route. JFM, which also has a loan portfolio, is thought to be planning a ¥100 billion loan-backed bond issue in October or November, underwritten by Mizuho Bank.