Moody's Structured Thinking: Improving SME Business Environment in Japan Boosts Auto Loan Performance

Moody's Investors Service says the default rate of corporate auto loans in Japan has declined, owing to an improvement in the operating environment for small and medium enterprises (SMEs) and stronger credit screening by lenders.

The decline in the default rate is credit positive for Japanese auto loan asset backed securitizations (ABS) that have corporate auto loans as the underlying assets.

However, Moody's says a further improvement in the default rate of corporate auto loans is unlikely because the recovery in the operating environment for SMEs in Japan remains moderate.

In addition, a further improvement in credit screening by lenders is unlikely, given that car sales in Japan are declining and that there is strong competition between auto finance providers.

Moody's conclusions are contained in the May edition of its Structured Thinking: Asia Pacific newsletter.

The newsletter also covers the Japanese residential mortgage backed securities (RMBS) market, reporting that Moody's has upgraded 46 tranches of 36 Japanese RMBS deals since January 2014.

The vast majority of these deals have a high constant prepayment rate and a principal deficiency ledger mechanism, which accelerate the build-up of credit enhancement.

The Structured Thinking newsletter also covers the Australian government's proposal to remove restrictions that prevent individuals from importing new vehicles directly from overseas.

If implemented, the lifting of restrictions on new vehicle imports would be credit negative for Australian auto loan and operating lease ABS, because it would lower the price of vehicles in the market, thereby affecting ABS pools by reducing recovery rates and increasing net losses when borrowers default on their loans. However, Moody's says the impact would be very limited, given the already competitive prices of new vehicles in Australia.

The Australian government has ruled out any changes to the current restrictions on used vehicle imports, which is positive for ABS.

Moody's newsletter also report on China's structured finance market, noting that large anchor tenants in Chinese shopping malls bring a long-term and stable cash flow to the properties -- a credit positive for commercial mortgage backed securities (CMBS) backed by these malls. However, Moody's says weakening operating conditions for some of these tenants -- such as department stores - could constrain mall valuations.

The May edition of the Structured Thinking newsletter contains the following articles:

• Australian Auto ABS: Removing Import Restrictions on New Vehicles Is Credit Negative, but Maintaining Barriers for Used Vehicles Is Positive
  
  
• Chinese CMBS: Anchor Tenants Offer Cash Flow Stability, but Limit Property Valuation Potential if They Are Weak
  
  
• Default Rate for Corporate Obligors in Japanese Auto Loan ABS Has Declined, but Further Improvement Is Unlikely
  
  
• High CPR and PDL Mechanism Are Credit Positive for Japanese RMBS with Sequential Pay Structure
  
  
• Credit Impact of High CPR in Japanese Apartment Loan Securitizations Depends on Waterfall Structure