Key Takeways
- Issuance increased 6% to about ¥6.1 trillion in 2024 with RMBS issuance declining 28% and ABS issuance increasing 30%; we expect a slight increase in total issuance in 2025.
- During surveillance of Japanese securitization transactions we rate, we did not raise or lower any ratings in 2024.
- In the J-REIT market, bond issuance remained well below that of 2021 or earlier; improvement in occupancy rates in office properties may slow in 2025.
Japanese annual securitization issuance is on a rising trend for the first time in three years.
Total new issuance of Japanese securitization transactions (see note 1) rose about 6% to about ¥6.1 trillion in 2024. Issuance of asset-backed securities (ABS), the largest asset class in the Japanese market, led growth with a 30% increase to ¥4.4 trillion. In contrast, issuance of residential mortgage-backed securities (RMBS), the other key driver of the market, fell about 28% to about ¥1.6 trillion.
Issuance of commercial mortgage-backed securities (CMBS) and collateralized debt obligations (CDOs) remained insignificant, totaling about ¥0.1 trillion.
Chart 1
In S&P Global Ratings' view, increased issuance of auto loan-backed ABS, a major sub-asset class, drove the growth in ABS issuance. Auto loan-backed ABS increased about ¥0.6 trillion to about ¥1.9 trillion.
Structural Decline Continues For RMBS Issuance
RMBS issuance dropped for the fourth consecutive year in 2024 to about half the amount of 2020. The Bank of Japan raised its policy rate in 2024 for the first time in 17 years, and market rates are on the rise. However, over 90% of new residential mortgages are floating rate loans, including fixed-rate convertible loans. Applicable interest rates on these loans are relatively low.
In contrast, most of the assets backing RMBS transactions are fixed-rate loans. A decline in new fixed-rate loan originations is a constraint on RMBS issuance, in our view.
We expect a slight increase in securitization issuance in 2025. New car sales were down about 7% to about 4.42 million units in 2024, constrained by a scandal over automakers' improper certification tests. In 2025, however, we expect securitization issuance to remain strong as new car sales return to growth after resolution of the auto certification issue.
In the RMBS sector, issuance is likely to start rising as borrowers increasingly seek fixed-rate loans to hedge against the future risk of higher interest rates in a rising rate environment. In addition, we believe that moves to securitize floating-rate loans that have accumulated in recent years will enhance new RMBS issuance.
Performance Of Existing Transactions Remains Stable
We did not raise or lower any ratings during surveillance of Japanese securitization transactions in 2024 (see notes 2 and 3).
Loans to individual borrowers are underlying assets for the RMBS and ABS transactions we rate. Unemployment remained low in Japan during 2024. With no significant change in employment conditions, these assets performed stably.
Default and delinquency rates remained low for auto loan ABS and private sector RMBS backed by owner-occupied residential mortgages or condominium investment loans. However, replacement/withdrawal rates on RMBS issued by Japan Housing Agency (JHF) that recovered from a temporary spike due to the COVID-19 pandemic are inching up. Currently, the rates are slightly higher than pre-COVID levels. However, we do not expect replacement/withdrawal rates to increase significantly given our forecast unemployment rate of between 2% and 3% for 2025.
We currently have 'AAA (sf)' ratings on most of the transactions we rate. Performance of underlying assets has been stable. Ongoing repayment of the issued liabilities has strengthened the stability of ratings for transactions with sequential amortization.
There is no accumulation of credit enhancement for transactions with pro rata redemption. However, defaults are trending in line with our expectations. We therefore took no rating action on these transactions.
We did not upgrade or downgrade the existing apartment loan RMBS that do not have 'AAA (sf)' ratings for the following reasons:
- Performance of underlying assets is becoming more volatile as the size of asset pools is shrinking;
- Repairs to defects in some apartments built by Leoplace21 Corp. are still ongoing. However, there has been no significant change in defaults, delinquencies, or vacancy rates.
Servicers Seek To Improve Efficiency And Diversify Earnings
As of the end of 2024, we had rankings on two residential mortgage loan servicers and one commercial mortgage loan servicer. We took no actions on our evaluations of these servicers in 2024. Our stable ranking outlooks on the servicers remain unchanged.
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. The Japanese government's support measures following the outbreak of the COVID-19 pandemic helped contain a rise in bankruptcies to some extent. The number of corporate bankruptcies returned to its pre-COVID level in 2023 and remains at that point.
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.
The two residential mortgage servicers we evaluate have focused on special servicing of nonperforming loan receivables directly extended and owned by JHF. Given a decline in new loan receivables entrusted by JHF, the two servicers are diversifying customers and earnings by leveraging their accumulated expertise in servicing-related operations. They are doing so by expanding servicing of loans for private-sector financial institutions and strengthening collection from unsecured loans after collateral disposition. They are also working to increase profitability through cost reduction, improving operational efficiency by going paperless, standardization, and automation.
The commercial mortgage servicer is also looking to increase new business to secure other earnings sources while improving operational efficiency.
J-REIT Bond Issuance Will Likely Remain Low
We did not assign ratings to any bonds issued by Japanese REITs (J-REITs) in 2024. In the overall J-REIT market in Japan, volume and the number of bond issuances remained low in 2024. The amount of equity offerings further declined from 2023. New property acquisitions continued to recover in 2024, both in number and value. This was driven by further growth in the hotel segment, which benefited from inbound tourism demand, and increased acquisitions of residential properties for which we expect demand to remain solid.
We believe J-REITs will remain selective and restrained about property acquisitions over the next year or two. We base this on the assumption that despite persistently high property prices, J-REITs will continue to find it difficult to raise capital through public offerings due to relatively cheap investment unit prices resulting from upward pressure on domestic 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.
Improvement in office occupancy rates may slow in 2025. In 2024, demand for office space recovered due to solid corporate performance and moves to relocate and expand offices to improve the working environments, in addition to limited new supply of office space.
According to data from Miki Shoji Co. Ltd., the average vacancy rate of office buildings in Tokyo's business districts increased substantially from 2020 due to the pandemic. The rate hovered between 6% and 7% from the second half of 2021, but started to improve in 2024, ending the year at 4.0%. Average rents also reverted to growth.
Occupancy rates in office properties may come under pressure again in 2025 given large amounts of new supply are scheduled to become available. Ample demand remains for high-grade properties in favorable locations. However, we expect less competitive office buildings to remain somewhat weak.
Demand for residential properties will likely remain solid. We expect to see modest improvement in retail facilities and hotels as they benefit from increased inbound tourism.
We expect the credit quality of the J-REITs we rate to remain stable over the next 12 months. They will likely perform solidly thanks to high-quality portfolios and maintain favorable EBITDA interest coverage ratios because of strong ties with financial institutions and low interest rates in Japan.
We also believe 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, J-REITs' 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, increased property leasing expenses, and other costs. 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.
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.
This report does not constitute a rating action.
| Primary Credit Analyst: | Hiroshi Sonoda, Tokyo (81) 3-4550-8474; hiroshi.sonoda@spglobal.com |
| Secondary Contacts: | Toshiaki Shimizu, Tokyo + 81 3 4550 8302; toshiaki.shimizu@spglobal.com |
| Yuji Hashimoto, Tokyo + 81 3 4550 8275; yuji.hashimoto@spglobal.com |
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