Research: Rating Action: Moody’s assigns a definitive rating to a risk transfer contract on a pool of residential mortgages

JPY45.2 billion in financial contract affected

Tokyo, March 31, 2023 — Moody’s SF Japan K.K. has assigned a definitive rating (a counterparty instrument rating, “CIR”) to the following credit risk transfer contract (“CRT”).

The complete rating action is as follows:

Transaction Name: Specified Money Trust Contract (2007016)

Contract Name, Initial Notional Amount, CIR Rating

Beneficiary Risk Transfer Contract, JPY45,156,449,023, Aa3 (sf)

Protection Seller: Trust account at JSF Trust and Banking Co.,Ltd. (“Trust”)

Closing Date: March 30, 2023

Final Maturity Date: March 31, 2029

Arranger: Mizuho Securities Co., Ltd.

RATINGS RATIONALE

The transaction is a six-year credit risk transfer on a Japanese residential mortgage loans portfolio (the “Reference Portfolio”) for which the Trust, as Protection Seller, sells credit protection to the Protection Buyer.

The definitive rating assigned to the CRT is based mainly on the credit quality of the Reference Portfolio, the terms of the CRT, the credit enhancement provided by the cash the Trust holds and the experience of the related residential mortgage backed-securities (RMBS) originator and servicer.

The investor as settler entrusts cash and creates the trust account as Trust. The cash is deposited into a bank account at an eligible financial institution.

The Protection Buyer enters into the CRT with the Trust to hedge the credit risk of the residential mortgage loans portfolio. The Protection Buyer currently retains some beneficial interests of the outstanding RMBS backed by that portfolio.

The mortgage loan portfolio referenced in the CRT (the “Reference Portfolio”), at all times, is a fixed percent of the outstanding RMBS portfolio.

The CRT covers losses on the Reference Portfolio from the first loss up to the CRT notional amount.

The Trust holds cash to be able to meet its credit protection payment obligations under the CRT up to a certain amount. As long as the losses in the Reference Portfolio do not exceed the amount of cash the Trust holds, the Trust is able to satisfy its protection payment obligations under the CRT.

The Protection Buyer pays a certain protection fee (premium) to the Trust once a year. The premium is used to pay the credit protection, trust fees of the Trust and the dividend to the investor.

The amounts of the credit protection payment under the CRT matches the fixed percent of the net loss amounts incurred on the mortgage loan portfolio by the outstanding RMBS. Only mortgage loan loss occurring in the Reference Portfolio during the transaction period, which is shorter than the average mortgage loan term, impact credit protection payments due under the CRT.

Having analyzed both the attributes of the Reference Portfolio and the originator’s residential mortgage loan pool historical performance, Moody’s estimated a lifetime expected cumulative gross loss rate, a lifetime portfolio Expected Loss (EL) and a lifetime MILAN Credit Enhancement (MILAN CE).

Considering the stability of the originator’s loan pool historical defaults and the transaction period, Moody’s estimated an expected cumulative gross loss rate of 0.6% and a portfolio EL of 0.24% for this transaction, which are equivalent to 20% of the lifetime assumptions. Moody’s also estimated a MILAN CE of 5.74% for this transaction by haircutting the lifetime MILAN CE by 30%.

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.

The rating is not linked to the credit quality of the protection buyer because the CRT does not terminate upon the protection buyer default.

Regarding CIR, the cross-sector methodology used was “Structured Finance Counterparty Instrument Ratings Methodology (Japanese)” published in March 2022.

The principal methodology used in this rating was “Moody’s Approach to Rating RMBS Using the MILAN Framework (Japanese)” published in September 2022 and available at https://ratings.moodys.com/api/rmc-documents/392659. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

A Request for Comment was published in which Moody’s requested market feedback on potential revisions to its RMBS methodology framework. However, at this time no associated country-specific supplement has been published which would be relevant for the Credit Ratings referenced in this press release.

Request for Comments can be found on the rating methodologies page on https://ratings.moodys.com.

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

The primary factor that could lead to an upgrade of the rating is better performance of the reference pool than Moody’s expected. The primary factor that could lead to a downgrade of the rating is worse performance of the reference pool than Moody’s expected.

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.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://ratings.moodys.com/documents/PBC_1288235.

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 https://ratings.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 https://ratings.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 https://ratings.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 issuer/deal page on https://ratings.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