Securitization business and blockchain in Japan | Consideration of the market transition from CLO (image damage by high-risk products) to unique small-sized products

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In this issue, we will discuss the securitization of small real assets (tokenization) that could not be securitized by using blockchain to reduce securitization costs.

 

The “Collateralized Loan Obligation (CLO)” held by major Japanese financial institutions has been increasing in recent years due to the difficulty of asset management due to low interest rates.

 

CLO: An investment product that packages loan bonds to multiple low-rated companies

 

・ CLOs held by domestic financial institutions

Norinchukin Bank (Norinkin Bank) 7,900 billion yen

Mitsubishi UFJ Financial Group ¥ 2,473.3 billion

Japan Post Bank ¥ 1,524.1 billion

 

The risk of loss from “collateralized loan obligations (CLOs)” is increasing due to the disruption of the crude oil, energy and aviation industries triggered by the spread of the coronavirus, and the various economic crises that may occur.

 

Ten years after the subprime loan problem, the CLO market has grown to $ 660 billion while promoting high-risk investment.

 

・ Diversification of financing methods

・ Improvement of balance sheet

 

There are aspects such as the benefits that securitization should bring and the image of the securitization business.

 

Japan’s securitization business had the following challenges: A lot of work for SPC management Handling multiple small projects requires many arrangers In recent years, the trend of deals has been shifting from real estate / money receivables to public private partnership (PPP) infrastructure.

 

* Infrastructure development based on the PPP method is being pursued to activate the infrastructure investment market in developing countries through public-private partnerships that utilize not only national financial funds but also private funds. ADB (Asian Development Bank) has set infrastructure demand in the Asia-Pacific region at about 1.7 trillion yen (about 190 trillion yen), and is expected to revitalize the market. However, due to political and natural disaster risks, there are many projects with a credit rating of BBB or lower, and business feasibility is also an issue.

 

The securitization business has provided a variety of investment opportunities with the times, but the market is expected to develop in a more normal manner in the future.

 

Legal regulations for securitization business

 

In Japan, securitization has progressed in the real estate market due to the problem of bad debt disposal.

 

・1951 Securities Investment Trust Law (current law on investment trusts and investment corporations) is enforced Late

 

1980s Japan’s land myth was born due to the bubble economy

A huge amount of bank lending was made with real estate as security, and land myths collapsed along with the collapse of the bubble economy

 

1993 Established a joint loan purchase mechanism

 

Purchasing bad loans from banks Real estate securitization begins to be used for disposal of bad loans (sale of unsold real estate)

 

1993 Special Bonds Law (Act on Regulation of Business Related to Specified Claims, etc.)

 

1995 Real Estate Specified Joint Business Act enforced

 

1996 Japan Big Bang Declaration

 

Former Prime Minister Ryutaro Hashimoto’s declaration to reform the financial system to make Japan an international financial market like New York and London

 

1996 Special Bonds Law (Act on Regulation of Business Related to Specified Claims, etc.)

 

Amended ABS (asset-backed securities) and ABCP (asset-backed CP) are defined as securities and can be issued

 

1998 SPC Law (Act on Liquidation of Specified Assets by Special Purpose Company) (Current Asset Liquidation Law) enforced

 

Promote banks’ disposal of non-performing loans (sale of unsold real estate)

 

1998 Securities Investment Trust Law (current Law on Investment Trusts and Investment Corporations) revised

 

The name is the Act on Securities Investment Trusts and Securities Investment Corporations

 

2000 Revision of the Investment Trust Law (Act on Investment Trusts and Investment Corporations)

 

Converting bonds from land to all property rights Revision of real estate investment trusts

 

2000 Revision of SPC Law Promote banks’ disposal of non-performing loans (sale of unsold real estate)

 

2001 TSE J-REIT started

 

In recent years, the market for infrastructure fund investment has been formed with the backdrop of securing local government resources (such as operating regional airports).

 

Current status and future prospects for alternative asset investment

 

The TSE infrastructure fund market was created in Japan in 2015.

 

・ Japan Infrastructure Fund Investment Corporation
・ Enex Infrastructure Investment Corporation
・ Tokyo Infrastructure Energy Investment Corporation
・ Canadian Solar Infrastructure Investment Corporation
・ Japan Renewable Energy Infrastructure Investment Corporation
・ Ichigo Green Infrastructure Investment Corporation
・ Takara Leben Infrastructure Investment Corporation

 

The above listed companies are listed, with a total market capitalization of ¥ 95.9 billion (February 20, 2020). At present, renewable energy funds are the main market, but in recent years, attention has been paid to EGS investment from the perspective of using private funds to develop and maintain infrastructure. Investing in a PPP infrastructure development fund in Southeast Asia is extremely difficult. Japan’s investment in infrastructure funds is becoming increasingly safer as an alternative asset (investment product) that is less affected by the economy.

 

The securitization business is expanding not only to monetary bonds such as real estate and “mortgage-backed securities (CLO),” but also to energy generation and public infrastructure (airports and ports). In addition, the securitization of various real assets has the advantage of providing investment opportunities to more investors, and in recent years, efforts to utilize blockchain to improve the efficiency of securitization operations Is being done.

 

Mitsui & Co., LayerX establishes next generation asset management company

 

Mitsui & Co., LayerX, SMBC Nikko Securities and Sumitomo Mitsui Trust Bank have announced that they will establish a new company in April 2020 to collaborate on a next-generation asset management business utilizing blockchain technology. Mitsui & Co. Digital Asset Management (pseudonym), a new company, plans to develop a system development and demonstration fund in order to use blockchain to securitize real assets and reduce management costs. Large companies have also participated, and the topic of DX (Digital Transformation) in the area of ​​asset management is being promoted, which is attracting much attention.

 

Mitsui & Co .: Asset management of alternative real assets

LayerX: Efficient securitization and securities management using blockchain technology

SMBC Nikko Securities: Sales of financial products

Sumitomo Mitsui Trust Bank: Real estate securitization (securitization), consulting

 

In Japan, social implementation of blockchain is progressing steadily centering on LayerX. There are great expectations that future efforts will be made for practical applications through collaborative demonstrations in various fields, which will lead to future market development.

 

US Wave Financial Group Bourbon Whiskey tokenized

 

Whiskey has the characteristic of “aging over time and improving its commercial value.” Whiskey has the merit of increasing prices as it is held as an investment product for a long period of time, and the market is expected to expand in recent years as whiskey sales are improving worldwide as well . Wave Digital Group, a U.S. digital asset company, has launched the Wave Kentucky Whiskey 2020 Digital Fund in partnership with Wilderness Trail Distillery in Kentucky.

 

This is an effort to turn bourbon whiskey worth approximately $ 20 million (approximately 2.18 billion yen) into tokens using blockchain technology and sell them as a maximum of 4 million tokens. It is anticipated that efforts to tokenize real assets will continue to be made in various countries in order to provide investment opportunities to more investors and improve market liquidity through tokenization using blockchain.

 

Conclusion

 

Increased investment opportunities in asset classes, which were previously unavailable, will foster more investors.

 

・ Securitization of small real estate that has not been formed due to the shortage of arrangers

 

・ Securities of previously unsecured assets such as infrastructure and whiskey

 

It is said that the above cases could be realized by streamlining the securitization and securities management processes using blockchain technology. New markets are expected to be created, such as the use of tokens in compliance with the laws and regulations of each country. In recent years, interest in small investments such as crowdfunding and social lending has increased. Tokenization using blockchain technology will bring unique investment targets to the world, which will further expand the Japanese investment market.

 

・References

「リーマン」類似、投資急増 農林中金など3社 CLO、計12兆円
 大手金融機関が、信用力の低い米国企業向けの貸出債権を束ねた金融商品「ローン担保証券」(CLO)への投資を急増させている。

 

CLOの火薬庫、くすぶる危険性-高債務の米企業に迫るトラブル
ローン担保証券(CLO)はウォール街の魔術が編み出した金融商品の1つで、数十年前から存在している。よく似た債務担保証券(CDO)と同様に、高リスクの債権をまとめてパッケージ化するためのツールだ。

 

課題多いアジアのPPP、加賀隆一・アジア開発銀行官民連携部部長(1) | インフラビジネスJAPAN
アジア大洋州のインフラ需要は1年間で約1.7兆ドル(約190兆円)――。ADB(アジア開発銀行)の推計が話題を呼んでいる。この需要を賄うには各国の財政資金だけでは足りず、民間資金の活用が必要だ。民間投資は進むのか。ADBの本拠地フィリピンでPPP(官民連携)事業に携わる加賀隆一官民連携部部長に聞いた。 (全2回)

 

https://www.jri.co.jp/MediaLibrary/file/report/rim/pdf/7392.pdf

 

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