TEXT-S&P:IAA reform could influence two deals backed by FILP loans

(The following statement was released by the rating agency)

Feb 02 - Standard & Poor's Ratings Services today said that the changes envisaged under the road map that the Japanese Cabinet approved on Jan. 20, 2012, for the reform of the system governing independent administrative agencies (IAAs), as well as the IAAs' organizational structures and operations, could affect the credit quality of two transactions. The two transactions are backed by beneficiary certificates based on a pool of fiscal loans extended under the Japanese government's Fiscal Investment and Loan Program (FILP).

The adopted road map stipulates that the Japanese government is to create a new system for the IAAs, and outlines actions the government needs to take in this respect. Specifically, the government is set to conduct a drastic and comprehensive examination of the current system governing the IAAs--which is designed such that all the entities operate under the same rules--as well as the IAAs' organizational structures and operations. The road map stipulates that the government is to carry out the measures required to switch the IAAs to the new system and organizational structures by the end of April 2014. As such, Standard & Poor's believes that any future changes that could actually be made in line with the adopted road map could lead us to review our ratings on the following two transactions: the FILP Master Trust 1st Special Purpose Co. series 1 transaction (FILP Master Trust 1) and the FILP Master Trust 2nd Special Purpose Co. series 1 transaction (FILP Master Trust 2).

The notes issued under the FILP Master Trust 1 and FILP Master Trust 2 transactions are currently rated 'AA+ (sf)'. The notes are currently backed by beneficiary certificates based on a pool of FILP loans extended to 11 government-related entities (GREs), eight of which would likely be affected if the reform were to be implemented (measures to be taken with respect to the eight entities are shown below). In our view, in such a case, changes in the following areas would likely influence the credit quality of these transactions: (1) the creditworthiness of the IAAs; (2) the diversification of the asset pools; (3) the correlations between assets; and (4) the recovery rates for loans extended to the IAAs following a default.

We have assigned our 'AA-' long-term rating and our 'A-1+' short-term rating to Japan Housing Finance Agency (JHF), which is one of the eight entities to be reviewed. The outlook on the long-term rating on JHF is negative. Meanwhile, we have conducted credit estimates for the seven other entities. Our current ratings on, or credit estimates for, the eight entities reflect to some extent potential changes in the credit quality of the IAAs as the reform progresses, although our assumptions with respect to the likelihood of a change in credit quality, as well as to other factors, vary from one entity to another. We intend to review and update our assessments of the credit quality of the IAAs as the details of the measures are released and the outlook for reform becomes clear.

We will also reassess the following factors: (1) concentration in the loan pools, which may increase if some of the debt of any obligor IAAs merged through the reform is succeeded by the surviving entities; (2) our asset correlation assumptions, after considering changes to the government's financial support for the IAAs as a result of the reform; and (3) our assumptions for the recovery rates of loans extended to the IAAs following a default, after considering how the reform of the IAAs could affect their operations and financial standing. Any changes in these assumptions could affect our view of the credit quality of the FILP Master Trust 1 and FILP Master Trust 2 transactions.

We will monitor the progress of the reform, and may review our assumptions and our ratings on the above transactions if required.

LIST OF TRANSACTIONS BACKED BY FILP LOANS

Name Initial issuance amount Issue date Legal final maturity Rating

FILP Master Trust 1st Special Purpose Co.'s series 1 notes*

JPY100 bil. Feb. 29, 2008 June 2020 AA+ (sf)

FILP Master Trust 2nd Special Purpose Co.'s series 1 notes*

JPY100 bil. Aug. 6, 2008 June 2020 AA+ (sf)

*The collateral for both transactions comprise loans to GREs.

DETAILS OF MEASURES TO BE TAKEN FOR OBLIGOR IAAs

-- Urban Renaissance Agency (URA): The government is to review URA's operations, and consider whether to divide and reorganize URA into smaller separate entities and whether to downsize the IAA. It is set to decide on a course of action by the end of fiscal 2012 (ended March 31, 2013). The government will also consider converting URA into a corporation with special status, which it would fully own. It is set to reach a decision on this by the end of summer 2012.

-- Japan Housing Finance Agency (JHF): The government is set to highlight fundamental issues and reach a decision by the end of summer 2012.

-- Welfare and Medical Service Agency (WAM): WAM is to become a "Seika Mokuhyou Tassei Houjin" (an entity that must meet targets set by the designated government minister). The primary objective for WAM's financial business is to develop audit and risk management functions similar or close to those envisaged under Japan's Company Law. The entity will be subject to the high-quality governance standards for Seika Mokuhyou Tassei Houjin under the Financial Businesses category, as stated in the road map document. In particular, it is to undergo onsite examinations by Japan's Financial Services Agency.

-- Japan Water Agency (JWA): JWA is to become a Seika Mokuhyou Tassei Houjin under the Administrative Businesses category. The objective is to entrust or transfer noncore functions (functions other than those that necessitate monitoring of conflicts of interest and those that involve safety issues) to other entities. JWA will be subject to a major downsizing.

-- Center for National University Finance and Management (CNUFM): CNUFM is to be abolished and its essential operations are to be succeeded by a new entity created through the merger of the National Center for University Entrance Examinations and the National Institution for Academic Degrees and University Evaluation.

-- Japan Railway Construction, Transport, and Technology Agency (JRCTTA): JRCTTA is to become a Seika Mokuhyou Tassei Houjin under the Administrative Businesses category. Specific operations and operations relating to ships will be subject to the governance standards applicable to typical Seika Mokuhyou Tassei Houjin. Meanwhile, financial support operations for coastal shipping companies will be subject to the high-quality governance standards for Seika Mokuhyou Tassei Houjin under the Financial Businesses category.

-- National Hospital Organization (NHO): NHO will be converted into an entity that is established in accordance with a law enacted specifically for the purpose of its establishment.

-- Japan Student Services Organization (JSSO): JSSO will be reorganized. Then, the government will consider primarily whether to (1) combine the entity with a new entity created through the merger of the National Center for University Entrance Examinations and the National Institution for Academic Degrees and University Evaluation; or (2) transfer some of the functions to other entities. It is set to reach a decision by the end of summer 2012.

RELATED CRITERIA AND RESEARCH

"Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors," published Nov. 4, 2011

"Rating On FILP Master Trust 2nd Special Purpose Co.'s Series 1 Notes Lowered To 'AA+ (sf)'," published April 28, 2011

"Rating On FILP Master Trust 1st Special Purpose Co.'s Series 1 Notes Lowered To 'AA+ (sf)'," published April 28, 2011

"Principles Of Credit Ratings," published Feb. 16, 2011

"Rating Government-Related Entities: Methodology And Assumptions," published Dec. 9, 2010

"New Issue: FILP Master Trust 2nd Special Purpose Co.," published Aug. 6, 2008

"New Issue: FILP Master Trust 1st Special Purpose Co.," published Feb. 28, 2008