S&P Global Ratings Japan took no rating actions (upgrades or downgrades, including defaults) on Japanese structured finance securities in 2023. Despite persistently high inflation coupled with wage growth not keeping pace with inflation, underlying assets in structured finance sectors showed relatively stable performance last year. There has not been a significant change in delinquency rates, a leading indicator for defaults, and no signs of deterioration. We also attribute low delinquency rates to Japan's low unemployment rate as the underlying assets of our rated notes is mostly made up by consumer-reliant sectors like residential mortgage loans in RMBS and auto loans in asset-backed securities (ABS). Additionally, 93.5% of S&P Global Ratings Japan are rated 'AAA,' the highest achievable rating. There were also no rating actions for transactions rated by S&P Global SF Japan.

Data Coverage And Methodology Overview

This study covers the transitions of long-term issue ratings on Japanese structured finance securities, including asset-backed securities, collateralized debt obligations (CDOs), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities, and single-name synthetic transactions. Issuer credit ratings and short-term ratings--such as those on asset-backed commercial paper (ABCP) conduits--are not included.

We present the rating transition statistics separately for S&P Global Ratings Japan and S&P Global SF Japan. The data for S&P Global Ratings Japan (previously named Standard & Poor's Ratings Japan) includes ratings that S&P Global Ratings assigned before S&P Global Ratings Japan began assigning credit ratings in July 2010. The data for S&P Global SF Japan (previously named Nippon Standard & Poor's) includes structured finance ratings that it has assigned since it began providing credit ratings in January 2012.

S&P Global Ratings Japan is a registered credit rating agency under Japan's Financial Instruments and Exchange Act (FIEA) and a constituent company of S&P Global Ratings, which is registered as a Nationally Recognized Statistical Rating Organization (NRSRO) under U.S. law. S&P Global SF Japan is a registered credit rating agency under Japan's FIEA but is not registered as an NRSRO under U.S. law.

The data in this study includes both public ratings and confidential ratings.

The upgrade and downgrade rates in the chart and tables 2,3, and 9 include rating changes within the wider rating category through use of the '+' and '-' rating modifiers. By contrast, the rating transition rates presented in table 1, tables 4-8, and tables 10-12 do not differentiate between ratings within the same rating category (for example, between the ratings 'A+', 'A', and 'A-'). Although the use of rating modifiers produces more precise information on rating transitions, the use of full rating categories increases the sample size for each rating level segmentation in the transition matrices.

Additionally, we base the upgrade and downgrade rates in the chart and tables 2, 3, and 9 on an approach that adjusts for rating withdrawals and discontinuance. Where we have withdrawn or discontinued a rating within the year under consideration--and the ratings move to not rated (NR)--we use the last rating before withdrawal or discontinuance in the transition rate calculation.

By contrast, the downgrade rates presented in table 1, tables 4-8, and tables 10-12 only include ratings that we lowered during the period and that we did not withdraw or discontinue. In these tables, ratings that we changed to not rated after a default appear in the 'D' column and are counted in default rate calculations.

We have included the rating history of all tranches with original ratings of 'AAA'.

This study does not include any analysis of CreditWatch placements. For more details on the methodology behind this study, see Appendix 2. Appendix 1 shows additional transition matrices for both S&P Global Ratings Japan and S&P Global SF Japan.

S&P Global Ratings Japan Transition Study

Historical rating transitions: upgrades and downgrades

The chart below shows annual upgrade and downgrade rates for Japanese structured finance securities rated by S&P Global Ratings Japan. At the end of 2023, the long-term weighted average upgrade rate (5.4%) marginally exceeded the long-term weighted average downgrade rate (5.2%). For reference, the downgrade rate peaked at 18.9% during the global financial crisis. There were no upgrades or downgrades in 2023, as was the case in 2022 and 2021.

Chart 1

Japanese structured finance rating transition matrix

Table 1 shows the 2023 rating transition matrix for Japanese structured finance securities rated by S&P Global Ratings Japan and the weighted average annual transition matrix from 1990 to 2023. All rating transitions in 2023 were withdrawals (NR).

Table 1

Rating transitions by asset class

The only sectors with outstanding credit ratings at the start of 2023 were RMBS and single-name synthetics. There were no outstanding ratings on ABS, CMBS, or structured credit at the beginning of 2023.

RMBS had no upgrades in 2023, the same as the prior three years. The RMBS asset class dominates in size, accounting for approximately 99.3% of all S&P Global Ratings Japan's outstanding structured finance ratings at the start of 2023.

The single-name synthetic asset class accounted for the remaining 0.7% of outstanding ratings at the start of the year, with a total of two ratings (see table 2).

Table 2

Table 3

Table 4

Table 5

Table 6

Table 7

S&P Global SF Japan Transition Study

Table 8 shows the 2023 rating transition matrix and the weighted average annual transition matrix of Japanese structured finance securities rated by S&P Global SF Japan, while Table 9 shows the 2023 rating transition matrix of Japanese structured finance securities rated by S&P Global SF Japan by sector. There were no upgrades or downgrades of structured finance securities rated by S&P Global SF Japan in 2023, and only a small number of 'AAA' ratings were withdrawn (see table 8). For S&P Global SF Japan, RMBS accounted for 89.2%, ABS 5.0%, and single-name synthetics 5.8% of total ratings at the beginning of 2023.

Table 8

Table 9

Country And Asset Class Determination

For the purposes of this and other structured finance rating transition studies, we have generally classified transactions of issuing entities domiciled in Japan and transactions involving the securitization of Japan-domiciled assets as belonging to the Japan region. But for some transactions and asset classes, this classification may not be relevant. For some synthetic CDO transactions, the issuer may be incorporated in an offshore tax haven and have underlying assets domiciled in a number of countries outside of Japan, but it may be sponsored by a Japanese institution and rated by S&P Global analysts in Japan.

We use a combination of a transaction's issuer country, the domicile of underlying assets, and our surveillance office to determine the regional classification for all structured finance securities we rate.

Credit ratings that S&P Global Ratings Japan and S&P Global SF Japan assigned to "asset securitization products" under Japanese legislation are included in this analysis. This study also covers private ratings, including confidential ratings, as well as ratings on structured finance products not classified as asset securitization products under Japanese legislation.

For classifying structured finance securities by asset class, the following are our guidelines:

• ABS: This asset class consists of transactions other than CDOs, CMBS, RMBS, and single-name synthetics. These transactions are generally backed by assets such as auto loans, consumer loans, equipment leases, and credit card receivables, but the asset class also includes most of the more esoteric asset subsectors, such as Japanese business securitization (JBS) transactions.
• CDO: These transactions are typically backed by a pool of corporate credit risk, often from more than one country. Transactions in this asset class can be further classified into cash flow and synthetic (including hybrid) CDOs, depending on whether the issuing vehicle owns the underlying assets directly or gains synthetic exposure to its credit risk, such as via credit default swaps.
• CMBS: This asset class consists of transactions backed by commercial mortgage loans. We also include JBS transactions primarily backed by cash flows from real estate properties in this sector.
• RMBS: This sector consists of transactions backed by owner-occupied residential mortgage loans, condominium investment loans, or apartment loans.
• Single-name synthetics: Also known as "repacks," these transactions involve the repackaging of a single reference entity--usually a corporation--with the rating on the structured finance security weak-linked to the issuer credit rating on the referenced company.

Appendix 1: Original-To-Current And Multiyear Average Transition Matrices

Table 10

Table 11

Table 12

Appendix 2: Methodology And Terminology

This section provides a detailed explanation of our rating transition methodology. It also explains the study's terminology, including definitions of transition windows, rating modifiers and full rating categories, near defaults, and the treatment of rating withdrawals and multiple 'AAA' ratings within a given structured finance transaction. These methodologies are consistent with the methodologies that we apply in our global structured finance transition studies.

Our ongoing enhancement of the database used to generate this study occasionally leads to changes in the reported statistics from one edition of the study to the next. However, each study includes statistics for previous years, ensuring that each study is self-consistent and effectively supersedes all previous editions.

Rating transitions

We base our ratings transition statistics on a "static pool" or "cohort" approach. This observes ratings on each security at the beginning and end of a given transition window and tabulates these ratings in a two-dimensional table to calculate the percentage of ratings that stayed the same and the percentage of ratings that changed over the period. During this process, every security is counted only once, even if it had more than one rating change during the period. In other words, we use the ratings on a security on the first and last days of the period to calculate the transition rates and disregard any interim rating changes.

Weighted average transitions

For weighted average transition rates, we calculate the individual transition rates of static pools as described above. We then create a single-averaged matrix weighted by the number of ratings in each static pool.

Transition windows

A transition window refers to a period in which we observe a security's rating behavior. For example, the 2023 performance transition window starts at the beginning of 2023 and ends at the end of 2023.

Rating modifiers

We use rating modifiers ('+' and '-') to calculate the upgrade and downgrade rates mentioned in the text of this study and in some of the charts and tables. However, the tables that show transition matrices segment ratings only by rating category (for example, the full 'BBB' category, rather than 'BBB+', 'BBB', and 'BBB-') for practical reasons. In these tables, transition rates do not count rating movements within the rating category, such as those to 'AA-' from 'AA' or to 'BBB-' from 'BBB+'.

Rating withdrawals

We do not include securities with withdrawn ratings at the beginning of a transition window in the transition and default rate calculations for that period. For ratings that we have withdrawn, if we subsequently confirm from available information that a default event has occurred, we treat the rating as a default (i.e., a 'D' rating) instead of the previous rating.

Identical 'AAA' ratings

We have included the rating history of all securities with original ratings of 'AAA' without collapsing the rating history of multiple tranches that were originally rated 'AAA' in a given structured finance transaction.

Near defaults

In this study, near defaults include securities downgraded to 'CC' or 'C'. If the rating on a security is already 'CC' or 'C' at the beginning of a transition window, we don't include it in the near-default category because that event did not take place during the transition window analyzed. We consider securities rated 'CC' or 'C' to be highly vulnerable to nonpayment risk.

Related Research

• Japan's 2023 Securitization Market: RMBS Issuance Down 15%, Feb. 1, 2024
• A Primer On Japan's RMBS Market, Jan. 24, 2024
• Japan Structured Finance Outlook: Inflation Entrenches?, Jan. 11, 2024
• Japan Private-Sector RMBS Performance Watch: Low Unemployment Supports Stability, Nov. 7, 2023
• JHF RMBS Performance Watch November 2023: Prepayments Down, Interest Rates Up, Nov. 6, 2023
• Japan Auto Loan ABS Performance Watch: Default Dip Over, Aug.2, 2023
• S&P Global Ratings Definitions, June 9, 2023