Moody's has also affirmed the Aaa (sf) rating of the Series One Class A Unsecured Notes and the Caa2 (sf) rating of the Class C Unsecured Notes.
Deal Name: Synthetic CLO of Regional Financial Institutions (Clover, LLC.)
Issuer: Clover, LLC.
JPY1,900,000,000 Series One Class A Unsecured Notes, affirmed at Aaa (sf);
Previously on 3 March 2011, assigned Aaa (sf).
JPY578,646,000 Series One Class B Unsecured Notes, upgraded to A3 (sf);
Previously on 3 March 2011, assigned Baa2 (sf).
JPY175,928,000 Series One Class C Unsecured Notes, affirmed at Caa2 (sf);
Previously on 3 March 2011, assigned Caa2 (sf).
Issue Date: 11 March 2011
Final Maturity Date: 28 May 2014
Reference Obligation: Loans to small and medium-sized enterprises (SMEs) in Japan
Originator/First CDS Buyer/Servicer: THE SAIKYO SHINKIN BANK, Toyama Shinkin Bank, KITAISEUENO SHINKIN BANK, Osaka Shinkin Bank, The Awaji Shinkin Bank
First CDS Seller/Second CDS Buyer: Japan Finance Corporation (JFC, Aa3)
Second CDS Seller: Clover, LLC.
Independent Auditor: Tokyo Kyodo Accounting Office
Note Trustee/Initial Deposit Bank: Mizuho Corporate Bank, Ltd. (Mizuho Corporate Bank, A1/P-1)
Calculation Agent: Mizuho Trust & Banking Co., Ltd.
Arranger: Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
The notes represent a synthetic CLO transaction referencing corporate loans for small and medium-sized enterprises (SME). These loans were originated by 5 financial institutions with the intention of securitizing them under a "purchase scheme" program of the Japan Finance Corporation (JFC).
The rating upgrade of the Class B Unsecured Notes reflects increased credit enhancement due mainly to deal amortization.
Moody's affirmed the rating of the Class A Unsecured Notes at Aaa (sf) because the increased credit enhancement is enough to support the highest rating, which is Aaa (sf).
Moody's affirmed the rating of the Class C Unsecured Notes at Caa2 (sf), given its low credit enhancement level and the outstanding amount of delinquencies.
The main factor for the uncertainty in Moody's analysis is the macroeconomic environment for SMEs, as well as the financing environment.
The Japanese economy is weak following the slowdown in the global economy. Although the business environment for SMEs is also weakening, government support for SME financing remains strong, as highlighted by favorable measures, such as the SME Moratorium Law, Safety Net Guarantee Program (No.5), Disaster-Recovery-Related Emergency Guarantee and Special Lending Programs.
Thus, the number of corporate bankruptcies is now at its lowest in 10 years.
As for the performance of the transaction, there were 8 delinquencies (approximately JPY188 million) in September, with one credit event so far. This performance is worse than Moody's initial expectation.
However, as a result of referencing loan amortization, the subordination ratio* for the Class B Notes rose to 38.8% in September 2012 from 21.1% in March 2011.
*The formula used to calculate the subordination in this transaction is Y/Z, where "Y" equals the outstanding principal amount of the Class C Notes subordinated to the Class B Notes and the total amount of the credit protection threshold**, and "Z" equals the current reference obligation amount.
**The Originators will individually hold the credit protection threshold amounts and use them to cover losses incurred on the loans that they themselves have originated (the "sub-pool"). The credit protection threshold amounts cannot be used to cover losses incurred against other sub-pools.
Moody's increased the expected credit event rate for the referencing pool to 4.0% (annualized) from 2.9%, given the delinquencies so far and the current business environment for SMEs. Moody's also assumes a zero recovery rate from a credit event.
In its rating analysis, Moody's takes into account expected credit event rates, outstanding delinquent loans, and changes in credit enhancement, including current subordination, using the CDOROM model.
If the annualized credit event rate were to increase from 4.0% to 6.0%, the model outputs for Class A, B and C would change from Aaa to Aa1 (Class A); from A3 to Baa3 (Class B); from Caa2 to Caa3 (Class C).
The principal methodology used in this rating was "Moody's Approach to Rating Japan SME CDOs" published on 30 September 2010, and available on www.moodys.co.jp.
Moody's did not receive or take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.
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Shinji Yoshizawa Analyst Structured Finance Group Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Koji Kumamaru MD - Structured Finance Structured Finance Group JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Releasing Office: Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Copyright 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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