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Introduction to Japan Credit Rating Agency (JCR)
May-Jun 2018
JCR in JapanJCR in Japan
2
Use of JCR Rating in Japan
- Nomura BPI (Bond Price Index)- Investment Guidelines (e.g.
GPIF)- BOJ Bond Purchase Program - ECAI for 85% of Japanese
Regional Banks- Tokyo Pro-bond Market (Eligible
CRA for Rating Requirement)
1. Established by Japanese institutional investors in 1985
2. Trust earned over 30+ years of credit rating services
3. Highest rating coverage for Japanese companies
JCR Rating = Benchmark for Japanese Investors
JCR in the WorldJCR in the World
3
NRSRO
Certified CRA
Registered CRA No.1
= Chair
Outline
4
Contents Page
1. About JCR 5
2. About JCR Rating 17
3. JCR’s Rating Coverage 28
4. JCR’s Green Bond & Social Bond Evaluation 43
5. Bond Market and Bond Investors in Japan 49
1. About JCR – Company Profile
5
Name Japan Credit Rating Agency, Ltd. (JCR)
Establishment 1 April 1985
Headquarters Jiji Press Building, 5-15-8 Ginza, Chuo-ku, Tokyo 104-0061 Japan
Shareholders Widely dispersed among 86 shareholders mostly consisting ofJapan’s institutional investors (see below) and 2 news agencies:- 15 Insurance companies- 5 Nationwide banks- 56 Regional banks
Board of Directors
• Shokichi Takagi, President and CEO• Yoichiro Yokoyama, Director• 3 non-executive directors
Main Business Areas
• Credit Rating• Research• Publication and Information Services
Regulatory Recognition
• Japan – Credit Rating Agency (CRA) registered with FSA• US – Nationally Recognized Statistical Rating Organization (NRSRO) registered by US SEC• EU – CRA certified by ESMA• Thailand – Approved foreign CRA certified by Thai SEC• Indonesia – Recognized CRA by Bank Indonesia for BI Regulation for Private External DebtECAI status: Japan, Hong Kong SAR, Turkey and the EU
Mission & Code of Conduct
6
Mission1. Contribute to the development of free, fair and transparent capital markets2. Be a prominent leader in credit evaluation in Japan by being
• fair and open to all stakeholders; and• independent and objective
3. Produce fair and quality analysis and provide credible and consistent rating information
Principles1. Look for the tides rather than the ripples2. Refrain from taking advantage of or recklessly accelerating market movements3. Behave with a recognition that credit ratings are public goods 4. Pay due attention to local context and accept diverse values
Code of Conduct 1. Quality and Integrity of Credit Rating Process2. Independence and Avoidance of Conflicts of Interest3. Officers and Employees’ Independence and Avoidance of Conflicts of Interest4. Disclosure of Credit Rating Information5. Treatment of Confidential Information6. Disclosure of JCR’s Code of Conduct and Communication with Market Participants
(Source) https://www.jcr.co.jp/en/criterion/
Rating Pioneer in Japan
7
Rated Financial Instruments by JCR2005 2010 2015
Corporate Finance (Bond, Loan)Restructuring, Exit-financeLeveraged Buyout (LBO)
Hybrid SecuritiesWBS, Project Finance
Asset Based Lending (ABL)Ship Financing
Cross-border LoanFund
FIs' Capital InstrumentsAviation Finance/EETC
Future Cashflow SecuritizationListed Infrastructure Fund
TLAC InstrumentsGreen Bond 1/
Infrastructure FundSocial Bond 1/
1/ Evaluation (not Credit Rating)
Investor Services
8
Website (www.jcr.co.jp/en)
“Rating-Eye”
“J-CRIS”
Bloomberg
Reuters
JIJI Press
Capital IQ
Website:Monthly viewers at around 30,000
• Subscription Service: Rating Eye• Database Service: J-CRISSubscribers:
Authorities, Public Sector Bank, Nationwide Bank, Regional Bank, Credit Union, Foreign Bank, Investment Bank, Insurance Company, Pension Fund, Mutual Fund, Asset Management Company, Real Estate Company, Manufacturing Company, Energy Company, Money Market Dealer, Auditor, etc.
JCR Rating in Investment Criteria
9
AAAAA+AAAA-A+AA-
BBB+BBBBBB-BB+BBBB-B+BB-
CCC
Nomura BPI (Bond Price Index)• Index of JPY denominated bonds issued in
Japan (including Samurai)• With “A range or above” rating from either
JCR, Moody’s, S&P or R&I
(Source) Nomura Securities, Bank of Japan, GPIF, NPFA
Government Pension Investment Fund (GPIF) –Investment Policy• Benchmark – Nomura BPI• Corporate bonds to be
invested must have a rating of “BBB range or above” either from JCR, Moody’s, S&P, Fitch or R&I
• If the rating is downgraded below BBB-, such bonds shall be sold.
BOJ’s Bond Outright Purchase• With “BBB range or above”
rating from either JCR, Moody’s, S&P or R&I
• Remaining maturity: 1-3 yearsNational Pension Fund Association (NPFA) –Investment Policy• Benchmark (Bond) –
Nomura BPI & Citigroup World Government Bond Index
Nomura DC Domestic Bond Index Fund (Mutual Fund) –Investment Policy• Benchmark – Nomura BPI
10
85% of Japanese Regional Banks adopt the Standardized Approach for CAR calculation under Basel II framework. JCR is an External Credit Assessment Institution (ECAI) for all of those banks.
Risk Weight for Standardized Approach under Basel II in Japan1/2/ Sovereign 3/ MDB Financial Corporates
Institutions 4/AAA~AA- 0% 20% 20% 20%
A+~A- 20% 50% 50%BBB+~BBB- 50% 100%
BB+~BB- 100% 100% 100%B+~B- 100% 100%
CCC and below 150% 150% 150%Unrated 100% 50% 100% 100% 5/
1/ Use of unsolicited ratings are prohibited except for sovereign.2/ If there are multiple ratings, adopt the risk category of the second highest rating.3/ Bond issued by the Japanese government and municipalities is weighted 0%.4/ Based on sovereign ratings of the entity incorporated.5/ 150% if sovereign risk weight is 150%.
150%
50%
100%
JCR = ECAI for Regional Banks
(Ref.) History of Credit Rating Industry in Japan
11
Major milestones of Japanese Credit Rating Industry1948 Promulgation of Securities and Exchange Act1949 Formation of Bond Underwriters Committee (BUC)
by major banks and securities firms1979 Establishment of Japan Bond Research Institute (JBRI)1985 Establishment of Japan Credit Rating Agency (JCR)
Establishment of Nippon Investors Service, Inc. (NIS)1987 "Rating" was adopted as one of bond issue
requirementsJapan MOF designated 6 CRAs as qualified CRA
1988 Termination of BUCRelaxation of bond issue requirements (e.g. rating level)
1990 Consolidation of bond issue requirements into "rating"1996 Repeal of bond issue requirements (i.e. rating
requirement)1997 First corporate bond default by Japanese company1998 Merger of JBRI & NIS2006 Japan FSA designates 5 CRAs as ECAI and announced
mapping result2010 Japan FSA introduced CRA Registration System
Registered CRAs in Japan1. Japan Credit Rating Agency, Ltd. (JCR)2. Moody’s Japan K.K.3. Moody’s SF Japan K.K.4. Standard & Poor’s Rating Japan K.K.5. Rating and Investment Information, Inc.6. Fitch Ratings Japan Limited7. Nippon Standard & Poor’s K.K.
(Source) Financial Services Agency, Japanhttp://www.fsa.go.jp/en/regulated/licensed/cra.pdf
Japanese Investors- Benchmark for Japanese
investors
JCR’s Global Strategy
12
Inbound
Foreign Issuers in
Japan
Outbound
Japanese companies in
foreign countries
Japanese Issuers- Over 60% Coverage for
rated Japanese companies
1. Stronghold in Japan 2. Support for Globalization
- Global Regulatory Recognition
- Alliance with EM CRAs
- ACRAA
- Investor Support for Cross-border Investment
Global Regulatory Recognition
13
JAPAN• Registered as Credit Rating Agency by FSA• Recognized as ECAI for Basel II
US• The only Japanese CRA
Registered as Nationally Recognized Statistical Rating Organization (NRSRO) by SEC
EU• The only Japanese CRA certified
under EU Regulation on credit rating agencies
INDONESIA• Accredited as Recognized CRA by Bank
Indonesia for BI regulation for corporate external debt management
HONG KONG• Recognized as ECAI by HKMA
THAILAND• Certified as Approved Credit
Rating Agency by Thai SEC
TURKEY• Recognized as ECAI by BRSA
Tie-up with EM CRAs
14
HQ: Karachi, PakistanOfficial Recognition: Securities and Exchange Commission of Pakistan & State Bank of Pakistan
HQ: Istanbul, TurkeyOfficial Recognition: Capital Market Board, Banking Regulation and Supervisory Agency & Treasury
HQ: Mumbai, IndiaOfficial Recognition: Securities and Exchange Board of India & Reserve Bank of India
HQ: Mexico City, MéxicoOfficial Recognition: Mexico’s National Banking and Securities Commission, US SEC & ESMA
HQ: Kuala Lumpur, MalaysiaOfficial Recognition: Securities Commission of Malaysia & Bank Negara Malaysia
HQ: Lima, PerúOfficial Recognition: Peru SEC (SMV) & Superintendencia de Banca, Securos y AFP
BAHRAIN
Islamic International Rating Agency (IIRA)
BANGLADESH
Credit Rating Agency of Bangladesh Limited (CRAB)Credit Rating Information & Services Limited (CRISL)Emerging Credit Rating Ltd.National Credit Ratings Ltd.
INDIA
Brickwork Ratings India Pvt. Ltd.Credit Analysis and Research Limited (CARE)CRISIL LimitedICRA LimitedSMERA Ratings Limited
INDONESIA
PT Pemeringkat Efek Indonesia (PEFINDO)
JAPAN
Japan Credit Rating Agency, Ltd (JCR)
Rating Agency of Regional Financial Center of Almaty City (RA-RFCA)
KAZAKHSTAN
KOREA
Korea Ratings Corporation (Korea Ratings)NICE Investors Service Co., Ltd. (NICE)
MALAYSIAMalaysian Rating Corporation Berhad (MARC)RAM Rating Services Bhd
PAKISTAN
JCR-VIS Credit Rating Company Limited (JCR-VIS)Pakistan Credit Rating Agency Limited (PACRA)
PEOPLES REPUBLIC OF CHINA
China Cheng Xin International Credit Rating Co., LtdChina Lianhe Credit Rating Co., Ltd.Dagong Global Credit Rating Co., Ltd (Dagong)Golden Credit Rating International Co. Ltd.Shanghai Far East Credit Rating Co., Ltd. (SFECR)Shanghai Brilliance Credit Rating & Investors Service Co., Ltd.
PHILIPPINES
Philippine Rating Services Corporation (PhilRatings)
TAIPEI, CHINA
Taiwan Ratings Corp. (TRC)
THAILAND
TRIS Rating Co., Ltd. (TRIS)
TURKEY
JCR Eurasia Rating
ACRAA – The Broadest Network of CRAs in Asia
15
At the initiative of JCR, the Association of Credit Rating Agencies in Asia (ACRAA) was founded in 2001 for mutual cooperation among CRAs in Asia.
The network has been expanded to 29 CRAs in 14 jurisdictions in Asia.
JCR serves as Chairman.
16
Training
Seminar
Report(Methodology, Industry, Country)
Direct Access to JCR analysts
Private Credit Assessment Report
Proactive Investor Support
Sep 2017JCR Seminar on European Financial Institutions’ TLAC and Capital Instruments
Dec 2017Banco Santander’s inaugural issuance of Samurai SNP Bond with JCR Rating
May 2017JCR’s Rating Assignment on Banco Santander
Jul 2017JCR’s publication of Issuer Report on Banco Santander
Nov 2017JCR’s Assignment of Preliminary Rating on Banco Santander’s Senior Non-Preferred (SNP) Bond
(e.g.) Banco Santander’s SNP Bond
17
Our Product – Credit Rating
18
Long-term Issuer RatingAAA, AA, A, BBB, BB, CCC, CC, C, LD, D
(Both Foreign Currency and Local Currency)
Rating Outlook Positive – Stable – Negative – Developing – Multiple
Long-term Issue RatingAAA, AA, A, BBB, BB, CCC, CC, C, LD, D
Short-term Issuer RatingJ-1, J-2, J-3, NJ, LD, D
Short-term Issue RatingJ-1, J-2, J-3, NJ, LD, D
Preliminary Rating(to be assigned preliminarily for marketing
purpose before terms are finalized.)
Private RatingJCR’s view expressed in the same rating format.
Distributions are limited to those who signed confidential agreement only.
Entities Bonds/Loans
Rating Definition (Long-term Rating)
19
Rating Definition
AAA The highest level of certainty of an obligor to honor its financial obligations
AA A very high level of certainty to honor the financial obligations
A A high level of certainty to honor the financial obligations
BBB An adequate level of certainty to honor the financial obligations. However, this certainty is more likely to diminish in the future than with the higher rating categories.
BB Although the level of certainty to honor the financial obligations is not currently considered problematic, this certainty may not persist in the future.
B A low level of certainty to honor the financial obligations, giving cause for concern
CCC There are factors of uncertainty that the financial obligations will be honored, and there is a possibility of default.
CC A high default risk
C A very high default risk
LD JCR judges that while an obligor does not honor part of the agreed to financial obligations, but it honors all its other agreed to financial obligations.
D JCR judges that all the financial obligations are, in effect, in default.
N.B. “+” or “-” is added between “AA” and “B” to stand for the relative strength within the rating level (e.g., BBB+).
Rating Definition (Short-term Rating)
20
Rating Definition
J-1The highest level of certainty of an obligor to honor its short-term financial obligations.Within this rating category, obligations for which the certainty is particularly high areindicated by the symbol J-1+.
J-2 A high level of certainty to honor the short-term financial obligations, but slightly less thanJ-1
J-3 An adequate level of certainty of an obligor to honor its short-term financial obligations, butsusceptible to adverse changes in circumstances
NJ The certainty of an obligor to honor its short-term financial obligations is less than in theupper-ranking categories.
LD JCR judges that while an obligor does not honor part of the agreed to financial obligations,but it honors all its other agreed to financial obligations.
D JCR judges that all the financial obligations are, in effect, in default.
<Benchmark (for reference only)>J-1+ AAA AA+ AA AA- A+
J-1 A+ A A-
J-2 A- BBB+ BBB BBB-
J-3 BBB- BB+ BB
NJ BB BB- --- C
Rating Scale - Global
21
Mapping ResultJCR Moody's S&P Fitch
Sovereign1-1 AAA ~ AA- Aaa ~ Aa3 AAA ~ AA- AAA ~ AA-1-2 A+ ~ A- A1 ~ A3 A+ ~ A- A+ ~ A-1-3 BBB+ ~ BBB- Baa1 ~ Baa3 BBB+ ~ BBB- BBB+ ~ BBB-1-4 BB+ ~ BB- Ba1 ~ Ba3 BB+ ~ BB- BB+ ~ BB-1-5 B+ ~ B- B1 ~ B3 B+ ~ B- B+ ~ B-1-6 Below B- Below B3 Below B- Below B-
Multilateral Development Banks (MDBs)2-1 AAA ~ AA- Aaa ~ Aa3 AAA ~ AA- AAA ~ AA-2-2 A+ ~ BBB- A1 ~ Baa3 A+ ~ BBB- A+ ~ BBB-2-3 BB+ ~ BB- Ba1 ~ Ba3 BB+ ~ BB- BB+ ~ BB-2-4 B+ ~ B- B1 ~ B3 B+ ~ B- B+ ~ B-2-5 Below B- Below B3 Below B- Below B-
Financial Institutions3-1 AAA ~ AA- Aaa ~ Aa3 AAA ~ AA- AAA ~ AA-3-2 A+ ~ A- A1 ~ A3 A+ ~ A- A+ ~ A-3-3 BBB+ ~ B- Baa1 ~ B3 BBB+ ~ B- BBB+ ~ B-3-4 Below B- Below B3 Below B- Below B-
Corporates4-1 AAA ~ AA- Aaa ~ Aa3 AAA ~ AA- AAA ~ AA-4-2 A+ ~ A- A1 ~ A3 A+ ~ A- A+ ~ A-4-3 BBB+ ~ BBB- Baa1 ~ Baa3 BBB+ ~ BBB- BBB+ ~ BBB-4-4 BB+ ~ BB- Ba1 ~ Ba3 BB+ ~ BB- BB+ ~ BB-4-5 Below BB- Below Ba3 Below BB- Below BB-
(Source) Financial Services Agency of Japan (FSA) (http://www.fsa.go.jp/policy/basel_ii/09.pdf)
N.B. The same mapping result was published by European Securities Markets Authority (ESMA).(http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2016.275.01.0003.01.ENG)
Rating Distribution
22
1/ As of the end of March 20182/ Ratings on Japanese companies (not including sovereign, municipalities, FILP agencies, medical and academic institutions, J-REIT, structured finance, guaranteed bonds).3/ “LD” stands for “Limited Default”; “CM” for “Credit Monitor”.
Rating Policy
23
Rating assignment and verification
Ratings are assigned as per published rigorous rating policy and methodologies, making use of all available information.Validity of ratings is verified by historical performance.
Analysts in charge Analysts are ensured to have sufficient knowledge and expertise.
Analyst Team and Rating Committee
A team is formed by multiple analysts, which makes a proposal to a rating committee. Analysts are ensured to have no conflict of interests to rating applicants.
Information Quality Quality of information is ensured to be sufficient for credibility of ratings.
Prior Screening For new asset securitization products, prior screening is made by a council of senior managers to confirm if it is possible to assign ratings.
Periodical Review of rating policy and methodologies
A council is established to periodically review the rating policy and methodologies.
Ad-hoc Review of rating policy and methodologies
Review is made to the rating policy and methodologies for asset securitization products when the risk characteristics of underlying asset changes materially.
Review and withdrawal of ratings
Ratings are constantly monitored and updated, and regularly reviewed.Should ratings be withdrawn, public announcement is made unless the rated entity or financial obligation cease to exist.
Rating Process
24
11. Publication
10. Rating Notification and Appeal Process
9. Rating Committee
8. Further Assessment
7. On-site Meeting Interview (and Site Visit if necessary)
6. Initial Assessment
5. Verification of Information Quality
4. Information Request
3. Prior Screening
2. Assignment of Rating Analysts
1. Request for Rating
Normally 2 months
12. Annual Review (Interview + Rating Committee)
If gross factual misunderstanding were identified, JCR would re-examine the rating by replacing analysts and reorganizing rating committee.
“Without delay”(FSA Ordinance)“Within 4 Business
Days” (JCR rule)
Rating Methodology
25
Corporate Construction, Food, Paper & Pulp, Chemical, Pharmaceutical, Petroleum, Tire, Glass, Cement, Iron & Steel, Non-ferrous Metal, Electronics, Machinery, Automobile & Auto-parts, Trading, Retail, Food Service, Real Estate, Railway, Land transport, Marine transport, Air transport, Warehouse, Information service, Telecom, Power, Gas
Financial Institutions Bank, Securities, Life Insurance, General insurance, Lease, Consumer finance, Credit sales and credit card, Capital and TLAC instruments
Public Sector Local Government, Fiscal Investment and Loan Program (FILP) Agency
Sovereign & Supranational Sovereign, Public Sector Entities, Multilateral Development Banks (MDB)
Medical institutions
Educational Institutions
Structured Finance ABS, RMBS, CDO, CMBS, Future Flow Securitization, Credit-Linked Products, WBS,Repackaged Financial Instruments, ABCP, Project Finance, Ship Finance, Aviation Finance, EETC, J-REIT, Listed Infrastructure Funds, Swap Counterparty, Deposit accounts and investment instruments, Commingling Risk, Backup Servicer
Others Holding company, Subsidiary, Hybrid Securities’ Equity Content, Financial Institutions’ TLAC and Capital instruments
N.B. All the methodologies are publicly available at JCR website: (https://www.jcr.co.jp/en/rrinfo/).
(e.g.) Sovereign & Country Ceiling
26
Rating
AAA
X+3
X+2
X+1
X
C
Sovereign Ceiling = Sovereign Rating
Country Ceiling(normally
Sov Rating+ 0-3 notch)
- Supra-national entities- Strong support from foreign parents
Entities with (a) stable and solid earnings base in foreign countries, (b) strong ability to raise funds in the international
capital markets, and (c) sound financial structure
Vast majority
Details are available at:<https://www.jcr.co.jp/en/pdf/dm25/JCR's_Rating_Methodology20141107.pdf>
(e.g.) Financial Institutions’ Capital and TLAC Instruments
27 Details are available at:<https://www.jcr.co.jp/en/pdf/dm26/Reference_Reports/20170427Financial_Institutions_Capital_and_TLAC_Instruments.pdf>
Notch-down approach ((A) + (B))
(B) (Shorter) Distance to Loss(A) Recoverability
Subordinated (e.g., Holding Company,
SNP, T2&T1)
-1 notch
TriggerLevel
Trigger event Notching
Very Low Point of non-viability (PON), Resolution 0Low Common Equity Tier 1 Ratio < 5.125% -1
Issuer’s discretion -1Issuer’s discretion but likely constrained bysystem or authorities' intention
-2
Common Equity Tier 1 Ratio < 7.0% -3
High
(cf.) Notch-down for Holding Companies’ TLAC instruments in jurisdictions other than Japan
= “Structural Subordination (-1)” + “Very low trigger (0)” + “Country specific bail-in possibility prior to PON/Resolution, if any (0 or -1)”
JapanSeniority Trigger
Senior debt (=Issuer Rating) Default -1 AA-Sub debt Default -1 AA- -2Tier 2 (>5y, not perpetual) PON -1 -2 A+Tier 2 (perpetual) 1/ -2 -3Additional Tier 1 (AT1) 2/ -3 -4 A-
1/ Shortage in distributable funds (discretion)2/ Shortage in distributable funds (mandatory), CET1<5.125%
(mandatory), PON (mandatory) or issuer's discretion
AA
IssuerBank Holding
EUSeniority TriggerSenior debt (=Issuer Rating) ResolutionSenior Non-Preferred Debt Resolution -1 AA-Tier 2 (>5y, not perpetual) 3/ -2 A+Additional Tier 1 (AT1) 3/, 4/ -4 A-
3/ State Aid (Bail-in), PON, Resolution4/ Issuer's discretion for optional suspension of dividend
or interest payment, etc.
IssuerAA
28
Rating Industry Landscape
29
JCR Ratings are solicited by over 600 Japanese Companies, 62% of the total.
Industry-wise Coverage (Japan)
30
No. 2/ JCR Coverage 3/ No. 2/ JCR Coverage 3/
Fishery, Agriculture and Forestry 2 100% Precision Instrument 11 36%
Mining 2 50% Other Product 15 47%
Construction 27 63% Electric Power and Gas 20 60%
Food 38 71% Land Transport 34 74%
Textile and Apparel 7 71% Marine Transport 4 100%
Pulp and Paper 10 60% Air Transport 2 100%
Chemical 57 49% Warehousing and Harbor Transport Service 12 67%
Pharmaceutical 18 11% Information and Communication 25 60%
Oil and Coal Product 7 86% Wholesale Trade 47 70%
Rubber Product 6 83% Retail Trade 39 77%
Glass and Ceramic Product 13 62% Banks 156 76%
Iron and Steel 13 85% Securities and Commodities Futures 28 75%
Non-ferrous Metal 14 64% Insurance 39 56%
Metal Product 8 75% Other Financing Business 62 81%
Machinery 45 56% Real Estate 24 71%
Electric Appliance 53 38% Services 29 59%
Transport Equipment 37 43%1/ As of the end of Mar 20182/ Number of Japanese companies that solicit credit ratings3/ Not including unsolicited ratings
Coverage – Japanese Banks
31
JCR has the highest rating coverage for Japanese Banks.
Coverage – Banks’ Capital Instruments
32
The only CRA that rates Japanese megabanks’ all B3AT1 instruments.
(Source) Bloomberg
Coverage – Hybrid Securities
33
Market leader for Hybrid Securities’ ratings in Japan.
Judgment of Equity Calculation
Equivalent to Stock 100%
High 75%
Medium 50%
Low 25%
Equivalent to Debt 0%
Key Criteria Consideration
Permanence of Principal
Any legal redemption obligation? Call provision? Reinforcing factors?
Flexibility of Interest Payment
Any flexibility to suspend interest/dividend payment?
Cumulative?
Subordination The lowest claim ranking upon bankruptcy?
2017 MS&AD Insurance Group Holdings Subordinated BondDon Quijote Subordinated LoanHitachi Zosen Subordinated LoanToyo Tire & Rubber Subordinated LoanYokohama Reito Subordinated LoanSompo Japan Nipponkowa Insurance Subordinated BondsSekisui House Subordinated BondsKonica Minolta Subordinated LoanSoftBank Subordinated LoanTaiyo Life Insurance Subordinated Bonds
2018 Hulic Subordinated BondsHulic Subordinated LoanNomura Real Estate Holdings Subordinated BondsConcordia Financial Group, Ltd. Subordinated BondsJFE Holdings, Inc. Subordinated BondsNomura Real Estate Holdings Subordinated BondsToyobo Subordinated LoanSuntory Holdings Subordinated Bonds
Coverage – Structured Finance
34
JCR rates a wide range of structured finance products in Japan,which totals over 1,000 financial products annually.
Coverage – Project Finance
35
Spearheads the ratings on PPP and securitization in Japan –contributing to market evolution of financial products.
Haneda Airport International Terminal
Civil Servants Housing
PASMO – subway IC card Mega Solar Bio-mass
Ship Investment Fund
Coverage – J-REIT
36
Market leader for J-REIT rating.
Coverage – Sovereign & MDB
37
Multilateral Development Banks JCR A (JP)African Development Bank (AfDB) AAA -Asian Development Bank (ADB) AAA AAACentral American Bank for Economic Integration (CABEI) AA- -Corporación Andina de Fomento (CAF) AA -European Bank for Reconstruction and Development (EBRD) AAAp -Inter-American Development Bank (IDB) AAA -International Bank for Reconstruction and Development (IBRD) AAA -
Asia Pacific EMEA Americas
AAA Australia, Japan, Singapore Belgium, Denmark, Finland, France,Germany, Netherland, Norway, UK
Canada, US
AA+ Hong Kong SARAA SpainAA- KoreaA+ Czech, Italy, Slovak, SloveniaA Malaysia Poland, PortugalA- Thailand México, PerúBBB+ India, Philippines HungaryBBB Indonesia RomaniaBBB- Turkey BrazilBB+ RussiaBBBB-
Coverage – Foreign Issuers
38
39
Non-JP Issuer Rating (Solicited only)Issuer Industry RatingMDB Finland
African Development Bank MDB AAA Pohjolan Voima Oy Energy A+Asian Development Bank MDB AAA Teollisuuden Voima Oyj Energy A+Central American Bank for Economic Integration MDB AA- France Corporación Andina de Fomento (CAF) MDB AA Electricite de France S.A. Energy AAInter-American Development Bank MDB AAA Orange Telecom A-World Bank (IBRD) MDB AAA Renault Automobile A-
India HungaryExport-Import Bank of India Bank BBB+ Hungary Sovereign BBB+ICICI Bank Limited Bank BBB+ National Bank of Hungary Sovereign BBB+Indian Railway Finance Corporation Limited Finance BBB+ Poland
Indonesia Republic of Poland Sovereign ARepublic of Indonesia Sovereign BBB SpainAdaro Energy Energy BBB- Banco Santander S.A. Bank A+
Korea TurkeyBusan Bank Bank A Republic of Turkey Sovereign BBB-Hanwha Chemical Corporation Chemical A- Unted KingdomHotel Lotte Services A Avation Finance BBHyundai Capital Services, Inc. Finance A+ CanadaKorea Electric Power Corporation Energy AA- Export Development Canada Finance AAALotte Card Finance A Quebec (The Province of) Municipality AA+Lotte Shopping Services A United StatesPOSCO Steel AA- KKR & Co. L.P. Finance A+Shinhan Bank Bank A+ Mexico
Malaysia America Movil, S.A.B. de C.V. Telecom AMalayan Banking Berhad Bank A United Mexican States Sovereign A-
EM Samurai Issues
40
To Cultivate & WidenInvestor Base with JCR Rating
1. Quality of Analysis- Registered CRA in Japan- In-depth information based on its
global network
2. Bilingual Services (JP&EN)- Japanese Report- Japanese Analyst
3. Additional Value- Bond Index (Nomura BPI)- Investment guidelines- ECAI for 85% of Japanese Regional
Banks
41
Non-Japanese BanksShadow [3 Banks]
Shadow [2 Banks]
Deutsche Bank (A+p)
Shadow [3 Banks]
Shadow [2 Banks]
Banco Santander (A+)
Busan Bank (A)Shinhan Bank (A+)
May Bank (A)
Exim India (BBB+)ICICI Bank (BBB+)
Export Development Canada (AAA)
Shadow [4 Banks]
Shadow [1 Bank]
Shadow [1 Bank]
N.B. “Shadow” = Internal Rating used for structured products (e.g., credit linked note, repackaged note)
JCR Bond Rating (as of 30 Apr 2018)
42
Country Issuer Date JCR Rating Maturity Amount(JPY bil)
CouponRate (%)
France Electricité de France Jan 2017 AA
10 year12 year15 year20 year
107.919.66.43.1
1.088%1.278%1.569%1.870%
France Renault Jun 2017 A- 3 year5 year
63.426.6
0.360%0.500%
Korea Shinhan bank Nov 2017 A+1.5 year3 year5 year
1.316.78.3
0.180%0.360%0.520%
Spain Banco Santander(Senior Non-Preferred) Dec 2017 A 5 year
10 year83.712.2
0.568%1.015%
Turkey Sovereign Dec 2017 BBB- 3 year 60.0 1.810%
China China Eastern Airlines(Guaranteed) Mar 2018 AA 3 year 10.0 0.330%
Hungary Sovereign Mar 2018 BBB+ 3 year 30.0 0.370%
US KKR Mar 2018 A+5 year7 year
20 year
25.05.0
10.3
0.509%0.764%1.595%
Mexico Sovereign Apr 2018 A-
5 year7 year
10 year20 year
57.224.138.715.0
0.600%0.850%1.050%2.000%
43
Growing Demand for ESG Investment in Japan
44
Wider Investor Base (JRTT Green Bonds in Nov 2017)Investors for Green Bonds by Japan Railway Construction, Transport and Technology Agency (JRTT) (assessed by JCR) - Banks, Life Insurance, Investment Fund, Credit Union- University (Kansai, Kogakuin, Rissho)- Health Insurance (Sumitomo life, Kanihoken Kanyusha Kyokai)- Others
- Environmental Restoration and Conservation Agency- Osaka Prefecture Town Management Foundation- Promotion and Mutual Aid Corporation for Private Schools- Sakata Seed Corporation- UCR Infrastructure and Transport
http://www.jrtt.go.jp/05ir/ir-saikenResult.html
Intermediaries’ View – Nomura Securities DCM
(Mar 2017) “Obstacles for issuers to enter the green bond market remain high in terms of cost and complexity of bringing a deal to the market – specifically the need for third party verification of the borrower’s green claims.”
“It’s not just the extra work to justify the green credentials of the bond but a language barrier exists, in that most of the second opinion providers are not Japanese.” http://www.globalcapital.com/article/b12bhj651t6dc4/locals-in-focus-with-japanese-green-bonds-all-set-to-blossom
JCR’s Green Bond Evaluation
45
Phase 1: Evaluation on Greenness(1) To confirm if the project is qualified as green
• Does it have positive environmental impact?• Based on ICMA GB Principles & MOE’s GB Guidelines
(2) To assess how much of the proceeds are used for the qualified green project
Green Portion Grade
100-90% g1
90%> g2
70%> g3
50%> g4
30%> g5
10%> Not eligible
Phase 2: Evaluation on MOTTo evaluate the Management, Operation and Transparency on the green projects
Score Grade
100-80 m1
79-60 m2
59-40 m3
39-20 m4
>20 m5
Phase 3: JCR’s Green Bond Evaluation
To be determined by Evaluation Committee.
m1 m2 m3 m4 m5
g1 Green 1 Green 2 Green 3 Green 4 Green 5
g2 Green 2 Green 2 Green 3 Green 4 Green 5
g3 Green 3 Green 3 Green 4 Green 5 -
g4 Green 4 Green 4 Green 5 - -
g5 Green 5 Green 5 - - -
Perspective Weight
1. Standard and Process to Select Green Project 25%
2. Management of Proceeds 25%
3. Reporting 25%
4. Organization’s Efforts 25%
Details are available at: <https://www.jcr.co.jp/download/d56f355f15ffdbc5de085b95feff5f151f9f45d5f81fa5cffb/20171102GB(EN).pdf>
JCR’s Track Record
46
Nov 2017Canadian Solar Infrastructure Fund, Inc. – Green Loan- Proceeds are used to acquire renewable energy generation assets and other related costs- JCR assigned “Green 1” (See next page for details)
Nov 2017Japan Railway Construction, Transport and Technology Agency – Green Bond- Proceeds are used for investment in urban railway construction- JCR verified that the bond is in line with the Green Bond Guidelines by Japan’s Ministry of
Environment
May 2018NYK Line – Green Bond- Proceeds are used to finance and refinance Eligible Projects, namely LNG fuelled vessels,
LNG Bunkering Vessels, Ballast Water Management System and SOx scrubber system.- JCR verified that the bond is in line with the Green Bond Guidelines by Japan’s Ministry of
Environment
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Canadian Solar Infrastructure Fund, Inc.
Case Study
1. Evaluation on Greenness = “g1”
• 100% of the proceeds are invested in solar projects (= green projects)
2. Evaluation on Management, Operationand Transparency = “m1”
• Environment assessment incl. CO2 reduction and potential soil contamination is duly taken for each project
• Use of proceeds is limited to the targeted power facilities, and traceable through specific bank accounts.
• Disclosure is made through “Securities Registration Statement”, which will be updated bi-annually.
• The parent company, Canadian Solar Inc., has widely contributing to the environmental issues. Their management is explicitly committed. Multiple external verifications are made for acquired assets.
• Long-term Loan (10 years from Oct 2017, JPY15.7 billion)• Proceeds are used to acquire renewable energy generation assets
and other related costs
“Green 1”
(Source) https://www.jcr.co.jp/download/ded8ed0e0839d0b1b9e797ffd7de085ab75da5e9994a1a0aa9/17d0667e.pdf
JCR’s Social Bond Evaluation
48
Phase 1: Evaluation on Social Impact(1) To confirm if the project is qualified as social
• Does it have positive social impact?• Based on ICMA Social Bond Principles
(2) To assess how much of the proceeds are used for the qualified social project
Green Portion Grade
100-90% s1
90%> s2
70%> s3
50%> s4
30%> s5
10%> Not eligible
Phase 2: Evaluation on MOTTo evaluate the Management, Operation and Transparency on the social projects
Score Grade
100-80 m1
79-60 m2
59-40 m3
39-20 m4
>20 m5
Phase 3: JCR’s Social Bond Evaluation
To be determined by Evaluation Committee.
m1 m2 m3 m4 m5
s1 Social 1 Social 2 Social 3 Social 4 Social 5
s2 Social 2 Social 2 Social 3 Social 4 Social 5
s3 Social 3 Social 3 Social 4 Social 5 -
s4 Social 4 Social 4 Social 5 - -
s5 Social 5 Social 5 - - -
Perspective Weight
1. Standard and Process to Select Social Project 25%
2. Management of Proceeds 25%
3. Reporting 25%
4. Organization’s Efforts 25%
Details are available at: <https://www.jcr.co.jp/download/7555252e52e07f955d77e30a77def2fd927f75c75c259287e7/SB%20evaluation%20EN.pdf>
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Flow of Funds
50
Flow of Funds in Japan (Stock, End of 2017, JPY tri)
Household Saving
51
Wealth of Japanese household keeps growing.
(Source) Bank of Japan "Flow of Funds Statistics" (End of Dec 2017)
Net Worth
(USD 13 tril)JPY 1,560 tri
Financial Asset
JPY 1,880 tri(USD 15 tri)
Financial LiabilityJPY 320 tri(USD 3 tri)
51%
18%
28%
3% BankDeposit
Securities
Pension &Insurance
Others
52
Bond MarketJapan has the 2nd largest bond market, but dominated by JGB.
53
Corporate Bond Market
No. of Corporate Bond Issuers : 423 (Sep 2017)
(cf) No. of Listed Companies: 3,607 (Mar 2018)
JPY Corporate Bond
54
Samurai (Public Offering)Tokyo Pro-Bond (Private)
Euro MTN (Private)
1. Bond Index Eligible (JCR “A-” or above)
2. Investor Base Wide
3. Issue Amount Larger
4. Documentation Japanese
5. GAAP FSA-approved GAAP *
6. Disclosure Semi-annual Update
7. Preparation Time Long
1 Not Eligible2 Medium3 Medium4 Japanese or English5 FSA-approved GAAP *6 Annual Update7 Medium
1 Not Eligible2 Medium3 Smaller4 English5 N.A.6 Annual Update7 FastGAAP approved by FSA: Australian, Belgium (EU-IFRS), Canadian, Dutch, Finnish, French, German,
Hong Kong (HK-FRS), IFRS, Irish, Korean (K-IFRS), Luxembourg, Malaysia (M-IFRS), Mexican, Norwegian, Singapore (S-IFRS), Spanish, Swedish, Swiss, Taiwan (Taiwan-IFRS), UK and US
+ Rating Requirement
(JCR, Moody’s, S&P, etc.)
Demand for Borrowing & Interest Rate
55
Bank-dominant financial sector + Subdued demand for borrowing
Banking Sector
56
Excess liquidity is depriving banks’ profitability.
Asset Management Industry
57 (Source) The Life Insurance Association of Japan
Asset management became challenging.
Cross Border Loan & Investment
58
Cross-border loan/investment became popular.
(Source) BOJ Financial System Report (Apr 2017)
Nationwide Banks
Regional Banks Credit UnionJPY tri
JPY
FX
Japanese Foreign Securities Investors
59
Japan is now the 2nd largest foreign portfolio investor.
EM Local Currency Bond Investment
60 (Source) The Investment Trusts Association of Japan
Household investors even take EM currency risk.
Cross Border Investors
61
But the lion’s share goes to institutional investors.
62
Cautious Investment StanceInstitutional investors are conservative.
(Source) Bank of Japan
(Source) Japan Securities Dealers Association
Value of JCR Rating
63
JCR Rating Cultivate & Diversity Investor BaseJCR rating is a key to open the door.
Sep 2017JCR Seminar on European Financial Institutions’ TLAC and Capital Instruments
Dec 2017Banco Santander’s inaugural issuance of Samurai SNP Bond with JCR Rating
May 2017JCR’s Rating Assignment on Banco Santander
Jul 2017JCR’s publication of Issuer Report on Banco Santander
Nov 2017JCR’s Assignment of Preliminary Rating on Banco Santander’s Senior Non-Preferred (SNP) Bond
(e.g.) Banco Santander’s SNP Bond
64
For further queries or informationhttps://www.jcr.co.jp/en/
Rating Request & Rating Information
Relationship Management DepartmentHaruhiko Shiono+81 3 3544 7012 / [email protected]
Rating Methodology International DepartmentAtsushi Masuda+81 3 3544 7448 / [email protected]
Project & Asset Finance DepartmentFumihiro Honda +81 3 3544 7018 / [email protected]
Green Bond, Social Bond &ESG Evaluation
Green Bond/ESG Evaluation DepartmentAtsuko Kajiwara+81 3 3544 7025 / [email protected]
General enquiries Special Advisor to the PresidentSatoshi Nakagawa +81 3 3544 7011 / [email protected]
The information in this material has been compiled by Japan Credit Rating Agency, Ltd. (JCR) based on the information publicly available and deemed reliable as of the date shown in the front page. No representation or warranty, expressed or implied, is made by JCR as to the accuracy or completeness of the information contained herein.