Monitoring needed of IAA reforms and impact on JHF notes: S&P

TOKYO: Standard & Poor's Ratings Services today outlined its views on the impact of the road map that the Japanese Cabinet approved at a meeting on Jan. 20, 2012, for the reform of the system governing independent administrative agencies (IAAs) and of their organizational structures.

Specifically, we considered the effects that the road map could have on the structured notes so far issued by Japan Housing Finance Agency (JHF; AA-/Negative/A-1+) and its predecessor, Government Housing Loan Corp. (GHLC).

Under the adopted road map, the Japanese government is set to reexamine the system governing IAAs and their organizational structures, and to take whatever action it deems appropriate to boost efficiency, including abolishing, privatizing, or consolidating the agencies. In particular, the road map document contains the following statement about JHF, the originator of the structured notes:

"Given the current instability of global financial markets, we need to ensure that the reform to be implemented does not throw the mortgage-backed securities (MBS) market into disarray. This is because any turmoil in the MBS market could have adverse effects, primarily by causing interest rates on long-term fixed-rate mortgage loans to rise."

One of the trigger events established under the scheme governing the issuance of JHF's structured notes is the privatization of the obligor (JHF) such that it becomes a corporation, or amendment of laws such that the obligor is allowed to file for corporate reorganization or other similar bankruptcy proceedings. If a change in JHF's status due to a trigger event were to occur, the investor would acquire the beneficiary certificates in place of the notes, and the notes would then lapse.

In other words, the transactions would no longer depend on the credit quality of JHF. Rather, we would consider the transactions' scheme to have changed to that of a typical residential mortgage-backed transaction (RMBS) (for details, see the report "Japan Housing Finance Agency Structured Notes: Structure And Issuance Data Updated For 2011," published May 6, 2011, on RatingsDirect on the Global Credit Portal).

In light of the above statement about JHF in the road map document, we do not expect the panel responsible for reviewing JHF's system to consider measures that could activate the above trigger. In particular, it is likely, in our view, that JHF will still not be allowed to file for corporate reorganization under whatever new system and organizational structure are adopted.

However, the road map document also states the following: "A commission comprising external experts will be established within the Cabinet Office to consider possible changes to JHF's organizational structure, including the adoption of a governance system under Japan's Corporation Act. The commission is set to highlight fundamental points at issue and reach a conclusion by the end of summer 2012." Thus Standard & Poor's will closely monitor the progress of the discussions in this area.

RELATED CRITERIA AND RESEARCH

"Japan Housing Finance Agency Structured Notes: Structure And Issuance Data Updated For 2011," published May 6, 2011 "Rating Methodology For Residential Mortgage-Backed Securities In Japan," published Aug. 19, 2007.

Copyright Reuters, 2012