Toyota’s Lost AAA Gives Japan Bonds Rare Value: Mortgages

Toyota’s Lost AAA Gives Japan Home Bonds Rare Value
R&I cited Toyota’s earnings coming under pressure because of a strengthening yen for its decision to downgrade the carmaker’s debt. Photographer: Jason Alden/Bloomberg

Credit ratings on Japanese mortgage bonds have surpassed Toyota Motor Corp., the country’s highest-ranked company by Standard & Poor’s, boosting their appeal for investors and driving spreads to the narrowest on record.

The Japan Housing Finance Agency sold 148.8 billion yen ($1.8 billion) of 1.44 percent bonds tied to home loans on March 27 that yielded 40 basis points more than government bonds, according to data compiled by Bloomberg. The spread was the narrowest for a new offering since April 2007, and compares with a coupon of 1.92 percent and yield gap of 68 basis points on residential mortgage-backed securities issued in March, 2011.

Insurers and banks are turning to the bonds, which are rated AAA by S&P and Rating & Investment Information Inc. after S&P on Feb. 20 affirmed Japan’s sovereign-debt rating at AA- and maintained a negative outlook, while R&I downgraded Toyota’s rating to AA+ on Feb. 15, effectively leaving no Japanese companies with AAA ratings.

“Japan Housing’s RMBS has now become a very rare investment in Japan,” said Nobuhiko Anbiru, a senior credit analyst at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “There are no Japanese companies that are rated AAA by R&I or S&P, so the fact that these bonds are rated AAA provides investment opportunities.”

Post-Quake Demand

Demand for the bonds also has increased as banks and insurers seek alternatives to utility debt, which accounts for 20 percent of outstanding corporate bonds in Japan, in the wake of the March 11, 2011, earthquake. Nuclear-plant operators stopped selling bonds after the disaster crippled Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant, leading to a downgrade of the utility to below S&P’s investment grade.

The extra yield investors demand to own mortgage-backed securities instead of government debt has declined to 17 basis points as of April 2, near the low touched in March 2011 following the earthquake, Nomura Securities Co. index data show. The premium was 32 basis points on April 1 last year. In the U.S., where defaults on subprime home loans triggered the global credit freeze in 2008, the yield premium on mortgage bonds versus government bonds fell to 37 basis points as of April 2 from 39 basis points as of April 1, 2011, according to Bank of America Merrill Lynch’s Mortgage Master Index.

The Bank of Japan’s policy to maintain rates near zero as it struggles to spur the world’s third-largest economy has already benefitted homeowners, who are enjoying financing costs at all-time lows. The average 35-year fixed-rate mortgage was

1.36 percent for the March 27 sale in Japan, according to the agency. That compares with the average 30-year fixed-rate mortgage of 3.99 percent as of March 29 in the U.S., according to a Freddie Mac index.

Toyota Downgrade

R&I cited Toyota’s earnings coming under pressure because of a strengthening yen for its decision to downgrade the carmaker’s debt.

“Toyota’s rating cut could set the standard for Japanese corporate bond investments,” said Masakatsu Mizukami, a manager at Dai-ichi Life Insurance Co.’s credit department in Tokyo. “Toyota’s downgrade could impact investors who are restricted to making their investment decisions based on such ratings.”

S&P warned that a downgrade of Japan’s sovereign-debt rating was likely if medium-term growth prospects weaken. Moody’s Investors Service cut Japan by one step to Aa3 on Aug. 24, citing “the build-up in Japanese government debt since the 2009 global recession.” Fitch Ratings has the nation at AA-with a negative outlook.

Expanding RMBS Market

The first RMBS in Japan was issued in 1997 and since then, the market has grown rapidly. Japan Housing, which buys home loans from financial institutions and packages them as securities for sale to investors to pass on risks, issued its first mortgage-backed securities in March 2001.

The Tokyo-based agency issued only about 50 billion yen worth in the first year, with issuance expected to grow to about 10 trillion yen at the end of this fiscal year on March 31, according to Shinsei Securities Co. Japan Housing also offers a loan where the interest rate is fixed for as long as 35 years.

The agency is planning to issue 1.71 trillion yen of RMBS in the fiscal year starting this month, and plans to price its Series 60 notes later in April, according to its website.

Japan Housing’s RMBSs are attractive because investors are protected from the risks associated with possible defaults on housing loans as the agency buys back those that become delinquent, leading to a AAA rating for the entity’s notes, according to Mitsubishi UFJ’s Anbiru. The delinquency rate of the mortgage loans extended by the government entity was 2.77 percent in March 2010, up from 2.11 percent the previous year.

‘Hesitant to Invest’

S&P assigned a AAA rating to Japan Housing’s Series 59 Notes that were sold on March 27, citing the likelihood of the timely payment of interest. The agency will put into trust 7,725 residential mortgage loan contracts worth about 189.6 billion yen with Mitsubishi UFJ Trust & Banking Corp., S&P said. House construction loans account for 62.3 percent, new home loans 26.5 percent, loans for existing homes 7.5 percent and refinancing mortgage loans 3.7 percent, S&P said.

When S&P cut the rating on some of the Japan Housing RMBS in October 2011, citing delinquent payments, some investors were “hesitant to invest,” said Yukio Egawa, chief strategist and head of research at Shinsei Securities in Tokyo. While not all investors have the restriction to buy only AAA rated bonds, there are investors who “prefer AAA rated bonds,” he said.

The agency’s RMBSs account for about 90 percent of Japan’s total mortgage-backed securities, according to Japan Housing. The former Government Housing Loan Corporation became the current entity in April 2007 to focus more on securitization and enabling private financial institutions to create a steady supply of long-term fixed-rate housing loans. While it stopped giving direct housing loans to potential homebuyers, it continued to carry on responsibilities as loan guarantor from the previous agency.

Similar U.S. Model

The structure of Japan Housing buying loans from private financial institutions and issuing mortgage-backed securities using the debt as collateral is similar to the U.S. government-controlled Fannie Mae. Japan Housing also underwrites insurance for long-term fixed-rate housing made by private banks, and guarantees the payment on mortgage-backed securities backed by the loans, a model similar to Washington-based Ginnie Mae.

Fannie Mae and Freddie Mac, the mortgage-finance companies that have been supported by the U.S. since being seized in 2008, guarantee $4.3 trillion of home-loan debt.

Dai-ichi Life, Japan’s biggest publicly traded life insurer, held 18.8 billion yen worth of Japan Housing’s RMBSs at the end of December. About 1.7 trillion yen of S&P-rated mortgage bonds were issued in 2010, 16.2 percent less than 2009, according to S&P. Japan Housing accounted for 90 percent of the offerings, with the rest by private financial institutions, mainly banks.

“We could see some widening in the RMBS only if utility bonds come back with the same credit quality they used to have before the nuclear crisis,” said Dai-ichi Life’s Mizukami, adding that that is unlikely.


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