Rating Action: Moody's assigns definitive ratings to Nakamichi Leasing - Leasing Receivables ABS 202008
Global Credit Research - 17 Aug 2020
JPY10 billion in Debt Securities affected
Tokyo, August 17, 2020 -- Moody's SF Japan K.K. has assigned definitive ratings to Nakamichi Leasing - Leasing Receivables ABS 202008 backed by leasing receivables and installment sales receivables.
The complete rating action is as follows:
Transaction Name: Nakamichi Leasing - Leasing Receivables ABS 202008
Class, Issue Amount, Dividend/Interest Rate, Rating
Senior Beneficial Interests, JPY3.7 billion, Fixed, Aaa (sf)
ABL, JPY6.3 billion, Fixed, Aaa (sf)
Total Issue Amount: JPY10 billion
Closing Date: August 17, 2020
Revolving Period: From August 2020 to August 2022
Final Maturity Date: July 31, 2030
Underlying Asset: Leasing receivables and installment sales receivables
Seller (Originator / Initial Servicer): Nakamichi Leasing Co., Ltd.
Back-up Servicer: Japan Collection Service Co., Ltd.
Asset Trustee: Mizuho Trust & Banking Co., Ltd.
Arranger/Underwriter: Mizuho Securities Co., Ltd.
RATINGS RATIONALE
The seller, being both originator and initial servicer, entrusts a pool of its leasing receivables, installment sales receivables and cash to the asset trustee. The asset trustee then issues the Senior Beneficial Interests, the Subordinated Beneficial Interests and the Cash Reserve Beneficial Interests.
Entrustment of the receivables is perfected against third parties under the Perfection Law. Perfection against obligors is not made unless certain events occur.
The asset trustee uses the proceeds from a limited recourse loan (ABL) to redeem a portion of the Senior Beneficial Interests.
The seller holds the Subordinated Beneficial Interests and the Cash Reserve Beneficial Interests and transfers the Senior Beneficial Interests to investors through the underwriter.
The transfer is perfected against relevant obligors and third parties under Article 94 of Japan's Trust Law.
The Senior Beneficial Interests and the ABL are structured pari-passu in the principal and dividend/interest waterfall under the trust agreement.
Credit enhancement is provided by the senior/subordinated structure and available excess spread. Subordination comprises approximately 16.2% of the total initial principal balance of the receivables.
The transaction has two years revolving period. If the principal amount of the Subordinated Beneficial Interests is less than the original principal amount at the end of each trust calculation date, the revolving period ends on the relevant trust calculation date. During the revolving period, the Subordinated Beneficial Interests can be redeemed, as long as the outstanding balance of the Subordinated Beneficial Interests exceeds the initial outstanding amount and certain conditions are met.
After the revolving period, the Senior Beneficial Interests and ABL are redeemed on a monthly pass-through basis, and the redemption of the Subordinated Beneficial Interests is suspended until the full payment of the Senior Beneficial Interests and ABL (sequential payment mechanism).
Key early amortization events include a servicer replacement event occurring, or asset performance triggers being breached.
If any early amortization event occurs, the dividend waterfall to the Subordinated Beneficial Interests is suspended, and excess spread is used to redeem the Senior Beneficial Interests and the ABL.
Defaulted receivables in the underlying pool are used as payment in kind for dividends on the Subordinated Beneficial Interests, while cash in an amount equivalent to the principal balance of the defaulted receivables is transferred from the interest collection account to the principal collection account (default trapping mechanism).
In preparation for servicer replacement, liquidity is provided in the form of a cash reserve at closing. This reserve covers scheduled dividend/interest payments on the Senior Beneficial Interests and the ABL, trust fees, and fees relating to the start of back-up servicer operations. Japan Collection Service Co., Ltd. is appointed as back-up servicer at closing.
Commingling risk is covered by the Subordinated Beneficial Interests.
The ratings are based mainly on the credit quality of the receivables, the transaction structure, and the servicer's experience.
Moody's estimated the annualized expected default rate of the underlying assets at 0.6% , after taking into consideration the receivable attributes, historical data on the seller's entire pool, and industry trends. The expected default rate is based on the default definition used in Moody's analysis and may not be comparable to other rates.
To determine the ratings, Moody's also conducted a cash flow analysis by adding stress consistent with the assigned ratings on parameters such as the expected default rate.
Moody's assumes that, given the structure of the transaction as well as other factors, the risk of interruption to the cash flow from the assets in the event of the originator's or the trustee's bankruptcy is sufficiently minimized to achieve the ratings assigned.
Moody's considers the originator sufficiently capable of servicing the pool, after having taken into account the originator's business experience and the servicing operations.
The principal methodology used in these ratings was "Moody's Approach to Rating ABS Backed by Equipment Leases and Loans" (Japanese) published in May 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1218879. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to a downgrade of the ratings:
The primary factor that could lead to a downgrade of the ratings is worse performance of the underlying assets than Moody's expected.
Moody's has also conducted the sensitivity analysis below which provides the number of notches by which the model-indicated output of the deal would have varied if different assumptions had been made as to certain key model parameters. The analysis assumes that the deal has not aged.
If the expected default rate was changed from 0.6% to 1.2% and 2.4% and other assumptions remained unchanged, the model-indicated output of Senior Beneficial Interests and ABL would change by 0 and 1 notch respectively.
The analysis results are model-indicated outputs, which are one of the many quantitative and qualitative factors considered by rating committees in determining actual ratings. This analysis does not intend to measure how the rating of the deal might migrate over time, but rather, how the initial model-indicated output of the deal might have differed if certain key model parameters had been varied.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of corporate assets from the collapse in Japan economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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 ratings tab on the issuer/entity page for the respective issuer on www.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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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 www.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 www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Kiyomine Sato Analyst 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
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