Fear is in the air - Japanese ABS loses its fans

Japan Banks May Face Loss as Subprime Problem Spreads (Update2)
By Mariko Yasu and Ichiro Suzuki

Aug. 17 (Bloomberg) -- Japanese banks including Mitsubishi UFJ Financial Group Inc. may face losses from their holdings of collateralized debt obligations and other asset-backed products, as risk aversion spreads from subprime mortgages.

``Direct exposure to subprime loans and mortgage lenders may be limited at Japanese banks,'' said Takahiro Tazaki, head of structured credit research at Barclays Capital in Japan. ``The bigger impact may come from price declines in a wider range of products such as asset-backed bonds, CDOs and hedge funds.''

Mitsubishi UFJ, Japan's biggest bank, Mizuho Financial Group Inc. and six others reported this month combined losses of 18.7 billion yen ($161 million) linked to investments backed by subprime loans. The disclosures represent less than 0.2 percent of their combined holdings of asset-backed bonds as of March 31, according to documents on their Web sites.

Prices of collateralized debt obligations, which repackage bonds, loans and derivatives into new securities, tumbled as defaults on home mortgages spread in the U.S., reducing investor appetite for risk. Credit and stock markets have been roiled by the mortgage crisis, forcing hedge funds managed by Bear Stearns & Co. and Sowood Capital Management LP to liquidate.

Mitsubishi UFJ shares closed 4.5 percent lower at 1.06 million yen, their lowest in two years. Mizuho dropped 5.1 percent and Sumitomo Mitsui Financial Group Inc. fell 3.9 percent. Japan's five top banks this week lost 3.43 trillion yen, or 12 percent, of their market value.

Asset-backed Investments
Japanese banks raised investments in asset-backed securities in the past decade to boost returns while growth in the local lending market remained sluggish with interest rates near zero. Sales of asset-backed debt in Japan rose 26 percent to a record 1.1 trillion yen in 2006.
Mizuho, Japan's second-biggest bank by assets, had 4.25 trillion yen of global asset-backed bonds as of March 31, according to documents on its Web site. Masako Shiono, the bank's spokeswoman, declined to comment on the regional breakdown.
Yusuke Fukui, Mitsubishi UFJ's spokesman, also declined to elaborate. Mitsubishi UFJ held 3.35 trillion yen of asset-backed products as of March 31, according its Web site.

``The collapse of the subprime-mortgage market has started to push down prices on almost the whole range of structured products, including many not linked to subprime loans,'' said Yukio Egawa, head of Japan securitization research at Deutsche Bank AG in Tokyo. ``Investors are fleeing structured products because of fears they'll get hit by subprime.''

Yields on AAA-rated collateralized debt obligations backed by asset-backed bonds with a maturity of seven years jumped more than fivefold to 2.5 percent in the past two months, according to research by Deutsche Bank. Yields on similar securities rated BBB, the ninth-highest grade, more than doubled to 20 percent in the same period.

`Worst Case'
``Worst case, subprime losses could hit 50 billion yen per bank if prices of asset-backed bonds, funds and leveraged loans continue to fall,'' said Shinichi Tamura, a banking analyst at UBS Securities Japan Ltd. Still, such losses would likely be offset by bigger unrealized gains on stocks and Japanese government bonds, he added.

The spread of the U.S. mortgage crisis has already produced casualties. BNP Paribas SA, France's biggest bank, earlier this month froze three asset-backed securities funds because it was no longer possible to ``fairly'' value their holdings, as concern over subprime losses rocked credit markets.

Australia's Rams Home Loans Group Ltd. failed to refinance A$6.17 billion ($5 billion) of short-term U.S. loans, forcing the lender to seek emergency funding. The company has no direct investments in U.S. subprime mortgages and all its customers in Australia take out insurance on their home loans, Rams said in a statement Aug. 14.

Sydney-based Basis Capital Fund Management Ltd. told investors Aug. 15 that losses at one of its hedge funds may exceed 80 percent as a result of turbulence in credit markets.

Revealed Losses
Mitsubishi UFJ said on Wednesday it had unrealized losses of about 5 billion yen on investments related to U.S. subprime loans as of the end of July. Sumitomo Mitsui said it recorded ``several billion yen'' of losses in the three months to June 30, after selling U.S. mortgage-backed securities.

Mizuho said last week it recorded a loss of 600 million yen from selling most of its 50 billion yen of subprime-related holdings. Aozora Bank Ltd. said it wrote off a 4.5 billion yen unrealized loss in the first quarter on its holdings of debt products backed by U.S. mortgages while Shinsei Bank Ltd. said its losses on subprime loans reached $30 million.