Transactional issues

SPV forms

Which forms can special purpose vehicles take in a securitisation transaction?

As explained above, TMKs are special purpose vehicles (SPVs) frequently used in securitisation transactions. In addition to TMKs, a trust is also a vehicle that is commonly used in securitisation transactions. Typically, the originator, as the settlor, will entrust its asset by conveying it to a trustee and, in return, acquire beneficial interests in the trust. Thereafter, the settlor will sell the beneficial interest to investors and thereby raise funds. Alternatively, the originator may be able to sell the beneficial interests in the trust to a TMK. In this case, the TMK will issue securities to its investors and the proceeds from the issuance are paid to the originator as payment of the purchase price for the beneficial interest in the trust. Also, pursuant to an amendment to the Trust Act made in 2006, the use of a declaration of trust is available in Japan.

For securitisation of real estate, limited liability companies (GKs) are also frequently utilised as SPVs. Usually each investor enters into a silent partnership contract (TK) with the GK, under which the investor makes a contribution to the GK and the GK distributes the profits arising from the asset (in this case, real estate) that it acquires using the funds contributed by the investor. Further, a general incorporated association under the Act on General Incorporated Association and General Incorporated Foundations (Law No. 48, 2006) is typically used to create a bankruptcy-remote holding company of the SPVs.

SPV formation process

What is involved in forming the different types of SPVs in your jurisdiction?

In determining which type of SPV should be utilised, parties take into consideration various factors. Cost is one of the most important factors. Generally, a vehicle that will require the involvement of a financial institution, for example, a trust for which a trust bank will need to be appointed to serve as its trustee, may be costlier than vehicles that do not require such involvement (eg, a GK). The nature of the investment, whether it is debt or equity, will also influence the type of vehicle to be used. Trusts and TKs are usually used for equity investments, whereas both debt and equity instruments can be issued by a TMK.

Governing law

Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?

Under Japanese conflict-of-law rules (the Act on General Rules for Application of Laws (Law No. 78, 2006)), the effect of an assignment of receivables, regarding the obligor and any third party, would be determined based on the law applicable to the assigned receivables. This means that even if the governing law of the receivables purchase agreement (RPA) is Japanese law, the effect of the assignment in relation to its obligor and any third party, such as matters related to perfection, under the RPA is determined based on the law governing the assigned receivables rather than the law governing the RPA.

Asset acquisition and transfer

May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?

Generally speaking, a Japanese SPV can acquire new assets or transfer its assets after issuance of its securities. The conditions for the acquisition of new assets or transfer of assets are reflected in the relevant contracts and are not stipulated by law. Usually such conditions are set forth in the contracts after taking into consideration their potential effect on:

  • the rating of the existing securities;
  • the loan-to-value ratio;
  • the debt service coverage ratio;
  • the limited recourse structure;
  • true sale-related concerns; and
  • other factors that may affect the securities.

Where a TMK is used as an SPV and acquires new assets or transfers its assets, unless such acquisition or transfer is anticipated under its asset securitisation plan (this plan is to be attached to the TMK’s business commencement notification, which is to be filed with the local finance bureau; see question 19), a change of the asset securitisation plan will need to be filed. This change may require the consent of interested persons, including all of the investors. Further, acquisition of additional parcels of real estate by a TMK is currently limited to certain cases, such as acquisition of real estate that is affiliated with the real estate already held by the TMK.


What are the registration requirements for a securitisation?

In general, no registration is required for securitisation, except for securitisations using a TMK or a TMS under the Securitisation Act and which require the submission to the local finance bureau of a prior notification of the business commencement notification or TMS notification, as the case may be. Documents such as the TMK’s asset securitisation plan (ie, a document setting forth the basic particulars concerning the asset securitisation to be carried out by the TMK) are to be attached to this notification.

Obligor notification

Must obligors be informed of the securitisation? How is notification effected?

Obligors need not be notified in order to carry out a securitisation. Rather, it is performed for the purpose of perfection of the receivables that are to be acquired.

There are three ways to perfect an assignment of receivables by:

  1. sending a written notice with a notarised date to the third-party obligor;
  2. obtaining a written consent with a notarised date from the third-party obligor; and
  3. registering the assignment with the competent legal affairs bureau pursuant to the Act concerning Special Exceptions to the Civil Code with respect to the Perfection of Assignment of Movables and Receivables (Law No. 104, 1998) (the Perfection Act).

In the case of method (iii), for an assignment to be able to be registered, the assignor must be a juridical person registered in Japan (ie, a Japanese corporation). No such limitation or restriction exists with respect to the assignee or obligor. Further, it should be noted that in Japan perfection of an assignment in relation to third parties, other than the obligor, is not sufficient to assert the assignment against the obligor. Methods (i) and (ii) would satisfy both requirements, but completion of the registration in accordance with the Perfection Act through method (iii) only relates to perfection in relation to third parties.

For the assignment to be perfected regarding the obligor, in addition to the registration provided in method (iii):

  • the assignor or the assignee must send to the obligor a notice stating that the assignment has been made, and that such assignment has been registered, together with a certificate of registered matters issued by the competent legal affairs bureau; or
  • the obligor must consent to the assignment and acknowledge the registration of such assignment.

In cases where method (iii) is used, which is often the case where receivable securitisation transactions are conducted on an undisclosed basis with regard to obligors, it is common for the procedures for perfection regarding the obligors in accordance with the above two methods not to be taken until certain events such as a default of the originator occurs.

What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?

The Act on the Protection of Personal Information (Law No. 57, 2003) (the Personal Information Protection Act) is the Japanese law that was enacted to protect the rights and interests of individuals while taking into consideration the usefulness of personal information, especially in light of the remarkable increase in the use of personal information with the development of our advanced information and communications society. Pursuant to the Personal Information Protection Act, a business operator handling personal information may not provide personal data to any third party without the prior consent of the affected individual, except where:

  1. the provision of personal data is done pursuant to applicable laws and regulations;
  2. provision of personal data is necessary for the protection of the life, body or property, and in situations where it is difficult to obtain the consent of the affected individual;
  3. provision of personal data is necessary for improving public health, or promoting the sound growth of children and it is difficult to obtain the consent of the affected individual; and
  4. provision of personal data is necessary to cooperate with a state organ, a local government or an individual or a business operator entrusted to execute certain affairs prescribed by laws and regulations in situations where obtaining the consent of the affected individual is likely to impede the execution of such affairs.

In conjunction with the transfer of receivables, some personal data may need to be provided to the SPV. For practical reasons, it may not be feasible to obtain the consent of the affected individual.

For credit card receivables, auto-loan receivables and lease receivables, to facilitate securitisation, the originator usually insists on the inclusion of a provision in the underlying contract with the obligors, which acknowledges the obligor’s consent to the provision of personal data in the case of an assignment (including, but not limited to, securitisation) of those receivables.

However, for assignments of receivables where the obligors’ express consent to the provision of personal data is not obtained, further analysis is necessary to consider whether the provision of personal data in that situation may contravene the restriction imposed by the Personal Information Protection Act. Regarding this point, the current practical interpretation of the relevant law suggests that since a receivable is assignable in principle, the consent of the person to the provision of personal data can be assumed in the case of an assignment of receivables to the extent it will be necessary for the management and collection of such receivables by the assignee. In this situation, the exception in (ii) may apply, and therefore securitisation of receivables should be feasible.

Credit rating agencies

Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?

Under the FIEL, credit rating agencies that satisfy certain conditions, such as the development of appropriate systems, can be registered. It is not mandatory for credit rating agencies to be registered in Japan. However, in cases where securities companies or other financial institutions conduct solicitations using a credit rating determined by an unregistered credit rating agency, they are required to explain to potential investors, among other things, that the ‘rating is a rating by an unregistered credit rating agency’.

The independence of registered credit rating agencies is required under the FIEL. The FIEL also provides for regulations applicable to registered credit rating agencies covering, among other things, the following:

  • quality control in the rating process, including measures to protect investors’ interests in respect of the interests of the credit rating agency or other interested parties such as issuers and originators;
  • prohibition of name lending;
  • prohibition of the provision of ratings to closely related persons;
  • prohibition of the concurrent provision of rating and consulting services;
  • timely disclosure of information including rating determination policies; and
  • periodic disclosure of information.

Therefore, a registered credit rating agency may be prohibited from providing a rating to a closely related issuer.

When rating securitised issuances, rating agencies mainly focus on cash flow analysis, bankruptcy-remoteness and operational risks of the transaction parties, taking into consideration quantitative and qualitative aspects of the structure and type of assets for each transaction.

Directors’ and officers’ duties

What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?

In cases where a joint stock company or a GK is used as an SPV, the Companies Act (Law No. 86, 2005) will apply.

With regard to joint stock companies, the relationship between the company and its directors is regulated by the provisions of the Civil Code addressing entrustment. Accordingly, a director has a duty to the company, to use the due care of a good manager (duty of due care) when performing the director’s duties. In addition to this duty of due care, the Companies Act provides that directors of a joint stock company must comply with all laws and regulations and the company’s articles of incorporation, as well as all resolutions adopted at general meetings of the company’s shareholders, and that directors must perform their duties faithfully for the benefit of the company. This duty is generally called the ‘fiduciary duty’ of directors. There are also special provisions restricting or expanding the responsibilities of directors in certain situations or under certain circumstances, including but not limited to where competitive transactions or conflict of interest transactions exist.

With regard to GKs, members who manage a GK owe a duty of due care and a fiduciary duty to that GK. Such members are jointly and severally liable to the GK for any damage incurred by the GK that is caused by the non-performance of duties of the managing members. Unlike a joint stock company, the Company Act does not specifically provide an exemption from such liability. However, it is generally understood that a GK can grant an exemption from such liability, either in advance or after the fact, and the method for obtaining such exemption or conditions for the grant of such exemption may be set out in the GK’s articles of incorporation.

In cases where a TMK is used as an SPV, the Securitisation Act will apply. The directors of the TMK owe a duty of due care and a fiduciary duty to that TMK. There are also special provisions restricting or expanding the responsibilities of directors in certain situations or under certain circumstances, including but not limited to, where competitive transactions or conflict of interest transactions exist. Further, if a third party sustains damages as a result of the wilful misconduct or gross negligence of directors of a joint stock corporation or a TMK or managing members of a GK in the performance of their duties, such directors or managing members will be jointly and severally liable to such third party for such damage.

There is no legal requirement for such directors or managing members to be independent of the originators or the owner of the SPV. However, it is usual practice for the SPV to appoint an independent director or managing member in order to secure the bankruptcy-remoteness of the SPV.

Risk exposure

Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?

There is no regulation under Japanese law requiring originators or arrangers to retain some exposure to risk in a securitisation.

However, the Supervisory Guidelines and policies announced by the FSA provide that, in cases where financial institutions invest in securitised products, it is recommended that such investments be made only by those to which the originator retains some exposure to risk.

Notwithstanding the foregoing, it is usual for rating agencies to require that the originator be exposed to some risk to acquire a higher credit rating for the securitised product.