S&P Global Ratings expects asset-backed securities (ABS) issuance to continue increasing and residential mortgage-backed securities (RMBS) issuance to decline further in the second half of 2024. We forecast total securitization issuance (see note 1) in Japan for the full year will rise to about ¥7 trillion from about ¥5.7 trillion in 2023.

For the ABS sector, new car sales were down about 13% year on year in the first half of 2024. We attribute this to certification fraud cases involving some automakers, which led the transportation ministry to issue shipment suspension orders. We believe new car sales will gradually recover as the orders are lifted. This will highly likely boost new ABS issuance.

We expect RMBS issuance to continue to trend down due to a decrease in new fixed-rate mortgages. A policy rate hike from the Bank of Japan (BOJ) would lead directly to higher interest rates on fixed-rate housing loans. This would make floating-rate loans appear cheaper in the near future, in our view. Mortgage banks that primarily offer fixed-rate housing loans have begun offering floating-rate loans in recent years. The issue amount of RMBS may begin rising if such institutions raise funds through RMBS issuance.

First-Half Issuance Totaled ¥3.6 Trillion, Driven By ABS

Chart 1

New securitization issuance rose 16% year on year to ¥3.6 trillion in the first half of 2024. We attribute the growth to increased ABS issuance, which rose 54% to ¥2.6 trillion and accounted for 73% of total issuance. An increase in transactions of ¥100 billion or more, related to mobile handset installment sales receivables and insurance company capital-raising, contributed to the growth, in addition to the increase in auto ABS issuance. In contrast, the amount of RMBS issuance declined 31% to about ¥0.9 trillion, accounting for only 24% of total issuance. Due to revision of the BOJ's monetary policy, interest rates on fixed-rate housing loans are on a rising trend, while those on floating-rate loans remain low. Borrowers are increasingly choosing floating-rate loans with lower interest rates as the gap with rates on fixed-rate products widens. RMBS transactions in Japan are mostly backed by fixed-rate housing loans. A decline in new fixed-rate loan originations has led to a drop in the amount of RMBS issuance.

Japan Housing Finance Agency (JHF), a long-standing leader in the Japanese securitization market, offers fixed-rate housing loans as its main product. JHF's RMBS issuance declined by 37% to ¥317.3 billion in the first half of 2024 due to a decline in new loan originations.

Ratings Unchanged And Will Mostly Remain Stable

We took no rating actions in our surveillance during the first half of 2024 (see notes 2 and 3).

Interest rates are increasing slowly following the BOJ's monetary policy shift. However, higher interest rates have had a limited impact on the performance of most owner-occupied RMBS transactions we rate, as they are mostly backed by fixed-rate loans. Delinquencies on JHF RMBS transactions (including Government Housing Loan Corp.'s RMBS transactions) we rate have been edging up since 2022, and are now slightly higher than levels before COVID-19. However, we believe that Japan's consistently low unemployment rate will underpin future performance of underlying housing loans. Defaults and delinquencies in the private-sector RMBS transactions we rate remain low. Our economic outlook assumes that the unemployment rate will remain about the same and inflation will decline modestly; we do not expect any significant changes in the macroeconomic environment for borrowers in the RMBS transactions we rate. We therefore consider it unlikely that the performance of underlying housing loans will change considerably in the second half of 2024.

Rising interest rates may affect the performance of loans backing condominium investment RMBS and apartment loan RMBS we rate because they are backed by floating-rate loans. However, as the rate hike has been limited, we have not seen any significant change in the performance of their underlying loans. Borrowers of apartment loans have signed long-term master leases with apartment builders and others, which stabilizes their rental income to make monthly repayments. We believe this underpins the performance of their underlying loans. On the other hand, we see stress factors for the performance of apartment loan RMBS. These include the prolonged unresolved problems related to defects at major apartment builder Leopalace 21 and a potential deterioration in the rental supply-demand balance as Japan's population declines.

Defaults on underlying loans backing auto loan ABS transactions remain low. This is partly due to the continued low unemployment rate and the relatively high credit quality of underlying loan obligors, in our view. In contrast, prepayments are rising. The prepayment rate for loans backing auto loan ABS we rate is at its highest level in the last 20 years. Prepayments could remain high for the time being, given used car prices at auction are showing a sign of increasing.

Servicers Seek To Diversify Earnings Amid Flat Market Growth

In February 2024, we affirmed our strong ranking on Mitsubishi HC Capital Servicer Corp. as a residential mortgage loan special servicer. We also affirmed our strong ranking on Capital Servicing Co. Ltd. as a commercial mortgage loan special servicer in May 2024.

We assign servicer rankings on two residential mortgage loan servicers. The two servicers both handle nonperforming loan receivables directly extended and owned by JHF as their main business. JHF has shifted its focus from direct lending to securitization support services. Loan receivables entrusted by JHF are decreasing as the balance of JHF's direct loan receivables is declining due to a progress of repayments. Given the circumstances, the two servicers are working to diversify earnings. For example, they seek to expand servicing of loans for private-sector financial institutions and strengthen collection from unsecured loans after collateral disposition. Given flat growth in entrusted receivables, the commercial mortgage servicer we rate is also looking to increase new business to secure other earnings sources.

According to the latest survey by the Ministry of Justice, outstanding receivables that servicers handle increased to ¥12.4 trillion in 2023, about 10% higher than the levels of 2020-2022. We attribute the increase to a rise in corporate bankruptcies due to the termination of COVID-19 related support measures. Japan's servicing market has been shrinking since its peak of ¥34.3 trillion in 2005. The market stands at about one-third of the peak level. We expect the servicing market to remain largely flat, as there has been no significant increase in nonperforming loans for residential and commercial mortgage loans.

Entrusted receivables account for about 90% of loan receivables handled by servicers. However, the share of acquired receivables has increased in recent years. This shows that servicers are seeking to expand their scope of business, in our view. Servicers are also working to improve operational efficiency and diversify earnings by leveraging their accumulated expertise. These measures, in addition to performance in the traditional servicing business, are key to our servicer evaluations.

J-REITs: Office Sector Recovery To Continue

We expect the credit quality of the Japanese real estate investment trusts (J-REITs) we rate to remain stable over the next 12 months. They will likely perform solidly thanks to high-quality portfolios and maintain EBITDA interest coverage ratios at favorable levels thanks to strong ties with financial institutions and low domestic interest rates. We also believe that the potential risk of rising interest rates is limited, as fixed-rate debt with a long remaining term to maturity will mitigate the risk of rate hikes. However, their ratios of cash flow to debt will continue to have limited headroom against our tolerances for the ratings. The ratios lag the levels seen before COVID-19 due to lower occupancy rates and increased costs such as property leasing expenses. The ratios may come under pressure if these J-REITs fail to cover higher interest rates and costs by raising rent levels and increasing occupancy.

We expect rents and occupancy rates to pick up in the office sector in the second half of 2024. We believe demand for office space is recovering amid solid corporate performance and moves to relocate and expand offices to improve the working environments, in addition to limited new supply of office space. On the other hand, rent levels and occupancy rates may come under pressure again in 2025 due to the following negative factors in the office building market. First, telecommuting and shared offices are becoming widely accepted following COVID-19 as companies revise their office strategies. Second, large amounts of new supply are scheduled to become available in 2025, following a glut in 2023. Demand remains ample for high-grade properties in favorable locations. However, we expect the office building market to remain somewhat weak, particularly for less competitive properties.

We did not assign ratings to any J-REIT bonds in the first half of 2024. We expect J-REITs to remain selective and restrained about property acquisitions over the next year or two. We base this on the assumption that they will continue to find it difficult to raise capital through public offerings amid stagnant unit prices due to rising pressure on interest rates. Nevertheless, we believe issuances intended for refinancing and green bond issuance, backed by stable fundraising conditions, will continue to support the J-REIT bond issuance market to some extent.

Notes

1. S&P Global Ratings calculations based on public information from rating agencies. Numbers are subject to change with additional information.

2. 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.

3. Any 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.