S&P Global Ratings and S&P Global SF Japan Inc. assigned ratings to 21 Japanese securitization transactions worth about ¥2.1333 trillion (see notes 1 and 2) in 2020 (see table 1). Japan Housing Finance Agency (JHF)'s residential mortgage-backed securities (RMBS) transactions remained the major driver of Japan's securitization market. The total amount of Japanese securitization transactions we rated inched down 2.3% year on year, despite the dizzying economic changes the pandemic brought.

In the course of our surveillance, we downgraded eight tranches of four transactions in 2020. We did not take any rating actions as a direct result of the pandemic. The performance of owner-occupied housing loan receivables has been recovering since autumn 2020 after temporarily worsening earlier in the year.

During 2020, we published commentaries examining the impact of the pandemic on Japan's securitization market.

• How Will COVID-19 Affect Japanese Structured Finance? April 8, 2020
• Scenario Analysis: Japanese RMBS' Credit Enhancements Tolerate Pandemic Stresses, Nov. 5, 2020

We have also updated guidance on our global methodology for analyzing properties in commercial mortgage-backed securities (CMBS) transactions to include jurisdictional assumptions for Japan. It now provides guidance on the approach including setting capitalization rates we typically employ in our analysis of office, retail, residential, and industrial properties such as warehouses (see "Guidance: CMBS Global Property Evaluation Methodology," published March 13, 2019).

Table 1

The Pandemic Barely Dented Total Issuance

Total issuance of rated Japanese securitization transactions came to ¥2.1333 trillion in 2020, down 2.3% from 2019.

Japan Housing Finance Agency (JHF)'s RMBS transactions remained the major driver of Japan's RMBS market, which accounts for the vast majority of the total rated issuance amount. Total issuance of rated JHF RMBS in 2020 inched up 1.6% year on year to ¥1.9528 trillion. Housing starts shrank about 10% year on year as a result of the pandemic, which added to the negative effects of the October 2019 consumption tax hike. In turn, new housing loans, which underly RMBS transactions, have been decreasing. Issuance of JHF's regular monthly notes, backed by new housing loans, dropped ¥40.1 billion from the previous year. Meanwhile, issuance of JHF's series T notes increased ¥70.0 billion, resulting in a slight increase in JHF's overall RMBS issuance. The series T notes are backed by residential mortgage loans directly extended by JHF's predecessor, the Government Housing Loan Corp. (GHLC).

Private sector issuance of rated RMBS transactions fell 55.1% year on year to ¥114.5 billion. In the private sector, we assigned ratings to Sumitomo Mitsui Banking Corp.'s 43rd and 44th RMBS transactions. In the asset-backed securities (ABS) segment, we assigned a rating to Driver Japan nine. The collateral comprises Japanese auto loan receivables that Volkswagen Financial Services Japan Ltd. originated.

We expect the new issuance of rated RMBS in 2021 to remain on par with that of 2020. This is because we expect continued issuances of serial transactions. Also, companies may seek to securitize assets to secure liquidity and cope with uncertainties amid the pandemic. These factors may help offset potential pressure on the outlook for the issuance amount in 2021. For example, the pace of economic recovery in Japan may slow because of the second state of emergency that the government declared in January 2021, following a third wave of COVID-19 infections that began toward the end of 2020. The Japanese economy had only just begun showing signs of recovering in the latter half of 2020 after the pandemic fueled a steep downturn in the spring.

Eight Tranches Of Four Transactions Were Downgraded

In the course of our surveillance in 2020, we downgraded two tranches of one asset-backed commercial paper (ABCP) deal and six tranches of three RMBS transactions. (The figures include confidential transactions. When we took rating actions on the same transaction at several different times during the period, we counted the actions as rating actions on multiple tranches/transactions.) No ratings were affirmed following the resolution of CreditWatch placements (see note 3).

We downgraded the two ABCP tranches because we lowered the short-term issuer credit rating on Shizuoka Bank Ltd. The transaction, which we no longer rate, was supported entirely by a backup commitment line that the bank provides.

We downgraded the RMBS tranches because of rental apartment buildings found to have defects. The construction company that built the apartments is severely behind schedule inspecting and repairing the buildings. Also, vacancy rates of these properties have risen substantially because the apartment builder as master lessor has basically ceased seeking new tenants at some apartment buildings.

We took no rating actions on rated transactions as a direct result of the pandemic in 2020. This is because delinquencies and defaults of owner-occupied housing loans have been trending down since autumn 2020, after a temporary increase following a state of emergency declared for April-May. The lack of actions also reflects our expectation for unemployment, which is highly correlated with the performance of housing loans, to remain relatively stable. We expect the unemployment rate to remain around 3% in 2021. Our ratings on RMBS transactions have remained generally stable. Our scenario analysis shows that less than 10% of the classes we rate would face negative effects if defaults rose 5 percentage points more and real estate prices declined 5 percentage points more than the current stress scenario (see "Scenario Analysis: Japanese RMBS' Credit Enhancements Tolerate Pandemic Stresses," published Nov. 5, 2020).

Ranked Servicers' Servicing Operations Are Unhindered By The Pandemic

We made no changes in 2020 in rankings on the three servicers we evaluate. As of the end of 2020, we had rankings on two residential mortgage loan servicers and one commercial mortgage loan servicer. We have determined through hearings conducted during monitoring of servicer evaluations that all three servicers have avoided serious pandemic disruptions.

The pandemic and declarations of states of emergency have forced servicers to adapt to extraordinary operational conditions. The two residential mortgage loan servicers have reacted flexibly. They have reduced overall on-site attendance but conduct all servicing operations, which involve negotiations with obligors on site. This is because the operations handle highly confidential customer information. During the 2020 state of emergency, servicers in effect temporarily halted collection operations after consulting with clients. The commercial mortgage loan servicer introduced a work-from-home arrangement with partial rotating shifts during the state of emergency. Since the lifting of the state of emergency, it has adopted a combined arrangement of on-site and remote work. Its servicing operations were unhindered during the state of emergency because it continued to negotiate with obligors during that period.

A survey by the Ministry of Justice shows that the number of servicers has dropped to 76 as of the end of 2019, from a peak of 102 in 2008. The amount of receivables they handle has roughly halved to ¥13.3 trillion from ¥28.6 trillion. The number of assets under management, though, declined only about 10% to 12.68 million from 13.98 million. The size of each asset and overall amount of receivables continued to shrink.

Servicers face a gradually contracting market and for now have to cope with the pandemic. Therefore, measures to increase the efficiency and maintain quality of their servicing operations will be key to our analysis.

J-REIT Office Property Market Is Declining

The total value of J-REIT bond issues we rated was ¥6 billion in 2020, up 20% from the previous year. The overall J-REIT market saw growth in issuance volume and number of issuances. The amount of equity offerings reached a five-year high. But the pandemic weakened J-REIT investment unit (equity share) prices, and new listings were absent for the first time since 2011. While investment unit prices are gradually recovering, the outlook for the real estate market remains uncertain. Therefore, we expect public offerings of investment units to be subdued in the coming 12 months.

The pandemic is likely to continue to weigh on rental revenue from and the occupancy rates of some segments in the coming 12 months, in our view. We specifically expect pressure on office buildings, retail facilities located in shopping and entertainment districts, and hotels. Demand in the office leasing market is likely to continue to contract owing to a downturn in corporate performance. This may continue into 2022 and beyond, given the market tends to lag economic cycles. Retail facilities and hotels are likely to continue to feel the impact of shifts in consumer behavior and sluggish demand, including from inbound tourism.

The largest J-REIT specializing in retail facilities, Japan Retail Fund Investment Corp., plans to stabilize its revenue by becoming a diversified J-REIT through a merger in March 2021. We believe further realignment may occur, particularly with J-REITs affected by the pandemic.

Rated J-REITs are likely to continue performing solidly in the coming 12 months, in our view. We expect their quality portfolios to help them cope with deterioration of the overall real estate market. They are likely to maintain or improve the quality of their assets and financial standing. This is because we believe they can finance new property acquisitions with property sales even if financing through public offerings remains difficult.

Notes

1. In this report, figures include rating actions by S&P Global Ratings and S&P Global SF Japan Inc. (SPSF). SPSF is a registered credit rating agency under Japan's Financial Instruments and Exchange Act (FIEA) but is not registered as a Nationally Recognized Statistical Rating Organization (NRSRO) under U.S. Laws. Therefore the credit ratings assigned by SPSF are Registered Credit Ratings under FIEA but are not Credit Ratings issued by an NRSRO under U.S. laws.

2. The transactions include confidential ratings, credit assessments, and J-REITs but exclude credit derivative products that lack issuances of bonds or trust certificates.

3. Rating affirmations in this report refer to cases where we removed the ratings from CreditWatch without changing the ratings. They do not include cases where we simply maintained the rating on a tranche such as affirmations as a result of a regular periodic review, nor do they include affirmations on ratings on some tranches of a transaction when the ratings on the other tranches were changed.