(The following statement was released by the rating agency)
Oct 11 - =============================================================================== Summary analysis -- Japan Finance Organization for Municipalities - 11-Oct-2012 =============================================================================== CREDIT RATING: AA-/Negative/A-1+ Country: Japan Primary SIC: Sovereign Mult. CUSIP6: 471060 Mult. CUSIP6: 471068 =============================================================================== Credit Rating History: Local currency Foreign currency 27-Jan-2011 AA-/A-1+ AA-/A-1+ 26-Sep-2008 AA/A-1+ AA/A-1+ =============================================================================== Rationale
The ratings on Japan Finance Organization for Municipalities (JFM) reflect our view that there is an "extremely high" likelihood of extraordinary support to JFM from the government of Japan in the event of financial distress, arising from the organization's very important policy role and its integral link with the central government in Japan's local and regional government (LRG) sector.
We assess JFM's stand-alone credit profile (SACP, which excludes potential extraordinary government support) as 'a+'. Its loan asset quality is very strong, with no nonperforming loans (NPLs) despite 100% concentration in one sector: all loans are made to Japan's LRGs and their related entities with LRG guarantees. In addition, JFM has had no credit defaults on its loans since the inception of JFM's predecessor entity in 1957. Although Standard & Poor's Ratings Services recognizes the heavy indebtedness of Japan's LRGs as a constraining factor, the status of JFM as a preferred creditor to LRGs helps maintain its 0% default rate.
Standard & Poor's uses its Government Related Entities (GRE) criteria to assess the credit quality of JFM. Our assessment is based on JFM's:
-- "Very important" role as the primary public financial institution supplying long-term, low-cost financing for Japan's LRGs to fund national policy targets and its status as a preferred creditor to the LRG sector for basic infrastructure-related funding.
-- "Integral" link with the government of Japan given that JFM's lending constitutes an integral part of the system support under the Local Borrowing Program (LBP) provided to LRGs by the Ministry of Internal Affairs and Communications (MIC).
Despite the central government divesting completely from JFM as of October 2008, we believe JFM's link to the government remains unchanged. The central government still provides its unconditional and irrecoverable guarantee to about 60% of JFM's outstanding debt. Currently, the organization is jointly owned by all LRGs in Japan, and the ratings incorporate the ongoing support that JFM receives from these bodies.
We consider JFM's liquidity position as adequate, backed by its conservative liquidity policy and stable long-term funding. Its long-term funding ratio remains above 95% and its short-term wholesale funding to total wholesale funding has been about 30% over the last five years. JFM has good access to Japan's domestic market--which we consider deep and liquid--and the unconditional and irrevocable guarantee of the central government is also available for part of its financing.
The negative outlook reflects the outlook on the sovereign ratings on Japan (AA-/Negative/A-1+), which constrain the outlook on JFM under our criteria. Any upward movement of the rating would depend on positive changes in the sovereign credit quality of Japan, hence an upgrade is unlikely unless we change the sovereign rating.
We do not expect material changes to JFM's very important policy role and integral link to the government. Also, we believe that JFM's asset quality is likely to remain stable, given its prudent asset management, and that its ALM risk management will improve further. The ratings could come under further pressure if JFM's asset quality deteriorates significantly, or its volume of assets expands to undermine its prudent risk management and financial health of the organization, thus leading to a significantly lower SACP. The ratings could also come under further pressure if we see evidence of a lower likelihood of central government support.
Related Criteria And Research Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010.