Social Bond / Social Bond Programme
External Review Form
Section 1.

Basic Information

Issuer name:
Japan Finance Corporation
Social Bond ISIN or Issuer Social Bond Framework Name, if applicable: [specify as appropriate]
Synthetic SME CLOs
Independent External Review provider’s name:
Japan Credit Rating Agency, Ltd.
Completion date of this form:
February 4, 2020
Publication date of review publication: [where appropriate, specify if it is an update and add reference to earlier
relevant review]

February 4, 2020

Section 2.

Review overview

SCOPE OF REVIEWThe following may be used or adapted, where appropriate, to summarise the scope of the review.

The review assessed the following elements and confirmed their alignment with the SBPs:☒

Use of Proceeds☒

Process for Project Evaluation and Selection☒

Management of Proceeds☒

Reporting

ROLE(S) OF INDEPENDENT REVIEW PROVIDER☐

Second Party Opinion☐

Certification☐

Verification☒

Scoring/Rating☐

Other (please specify):

Note: In case of multiple reviews / different providers, please provide separate forms for each review.

Latest update: June 2018

EXECUTIVE SUMMARY OF REVIEW and/or LINK TO FULL REVIEW (if applicable)
1. About Japan Finance Corporation
Japan Finance Corporation (JFC), the originator of this issue, is a policy-based financial institution establishedon October 1, 2008, under the Japan Finance Corporation Act (JFC Act), through the integration of NationalLife Finance Corporation, Agriculture, Forestry and Fisheries Finance Corporation, Japan Finance Corporationfor Small and Medium Enterprise, and international finance function of the Japan Bank for International
Cooperation. JFC is committed to supplementing the financing provided by ordinary financial institutions. In
the field of SME business, one of JFC's core operations, the government supports the growth anddevelopment of SMEs through finance, supplementing private-sector financial institutions, in particular aspolicy-based financial institutions specializing in SMEs, in order to provide financial support to relatively
higher-risk areas, such as the development of new businesses, business revitalization, business succession,and overseas expansion, which are regarded as important measures in Japan's policy-based finance. The
government also serves as a safety net, as well as providing support for the growth and development of
SMEs through finance. SME businesses are divided into three pillars: (1) providing stable, long-term, fixedinterest loans for the stable supply of funds required for the development of SMEs; (2) insurance
underwriting of debt guarantees for borrowing to support the smooth procurement of funds by SMEs andmicro-enterprises; and (3) securitization support services to facilitate the provision of unsecured funds to
SMEs.
2. Subject
This time, JCR shall evaluate whether the synthetic type of regional financial institutions CLO (loanreceivable-backed securities) (LLC Clover 2020), which is one of JFC’s securitization and refers to unsecuredloans to small and medium-sized companies. JCR shall evaluate whether the notes issued under the CLO,
meet the core components of Social Bond Principles (2018) and is consistent to SDGs goals. In the JFC’s Smalland Medium Enterprise Business, the CDS agreement is concluded with 30 regional financial institutions andthe limited liability company (SPC) will acquire some of the notes that the SPC is planning to issue. However,
the remaining notes are scheduled to be sold to investors. The Series One Class A Notes issued under the
CLO, the Series One Class B Notes, and the Series One Class C Notes guaranteed by the JFC are subject toevaluation.
3. Social Impact Evaluation
JFC aims to achieve two social improvement effects through the implementation of the CLO. The first is theeffects of regional revitalization, such as the maintenance and creation of employment, through the smoothprovision of funds to SMEs through unsecured loans provided through regional financial institutions. The
second is the support for stable management of regional financial institutions through the assumption ofpart of the risks associated with unsecured loans to SMEs by JFC and investors under CDS agreements with
JFC. Looking at the borrowers of loans from participating financial institutions, which are the reference
obligations of the CLO, approximately 40% of the total loans are to SMEs with small-scale demand for funds,
with JPY 10 million or less. Currently, local governments are facing social issues such as the hollowing out of
local economies due to the population decline and depopulation in rural areas, and business succession. JCR
acknowledges that the development of local industries and the survival of regional financial institutions
supporting them from the financial side are important measures for revitalizing Japan's local communities inorder to resolve these issues. Based on the above, JCR concludes that the use of proceeds contributes to the"access to essential services (financial services)" and " employment generation including through thepotential effect of SME financing and microfinance " among the eligible social project categories listed in thesocial bond principles. In addition, among the SDGs targets of 8 "Decent Work and Economic Growth," theobjective is consistent to target No. 8.3., “Promote development-oriented policies that support productive
activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalizationand growth of micro-, small- and medium-sized enterprises, including through access to financial services”
and target No. 17.17., “Promote the development, transfer, dissemination and diffusion of environmentallysound technologies to developing countries on favourable terms, including on concessional and preferential
terms, as mutually agreed.” In the "Specific Measures to Achieve SDGs" formulated by the Government ofJapan, JCR confirmed that the use of proceeds is consistent with "the strong economy that creates hope, andPage 2 of 7

the challenge of raising productivity by motivated individual businesses will be supported by support
agencies such as the government, business associations, regional SME associations, and regional financial
institutions," which are listed as measures closely related to SDGs8, etc. JCR concludes that JFC’s policy is
consistent to these international and national policy/initiatives.
4. Evaluation on management, operation and transparency
JCR confirmed that the proceeds in lieu of the issuance of the notes are appropriately allocated for the useof funds in accordance with the methodologies stipulated in the company bond memorandum, CDS
agreement, and other agreements related to this matter. In addition, JFC's business operations areevaluated annually by an evaluation and examination committee composed of outside experts in accordancewith the JFC Act, and JCR evaluates that the management and operation systems are transparent.
5. Overall evaluation result
As a result, based on the JCR social finance evaluation methodology, JCR assigned "s1" for the preliminary
evaluation of "Social Impact Evaluation (Use of Proceeds)" and "m1" for the preliminary evaluation of"Management, Operation and Transparency." Consequently, JCR assigned "Social 1." for the overall
evaluation. " The notes also fully meet the standards for the requirements of the Social Bond Principles andare consistent with the SDGs Objectives and concrete measures for the SDGs Goals of the Government.

Section 3.

Detailed review

Reviewers are encouraged to provide the information below to the extent possible and use the comment section to
explain the scope of their review.

1. USE OF PROCEEDS
Overall comment on section (if applicable):
The subject of evaluation is the synthetic CLO (synthetic type of regional financial institutions CLO (LLC
Clover 2020)) that refers to loans to SMEs offered by participating financial institutions under JFC's purchasetype securitization scheme. Using the CLO, JFC concludes a CDS agreement with 30 regional financial
institutions and acquires some of the notes that are scheduled to be issued by the SPC. However, JFC plansto sell the remaining notes to investors.
According to the report published by Japan Finance Corporation, the securitization support business provided
a total of \318.3 billion in unsecured funds to 11,760 SMEs in cooperation with a total of 235 financial
institutions from the commencement of operations in July 2004 to March 2019. This CLO scheme has been in
effect since 2004. One of the social issues facing Japan is the risk of business succession problems due topopulation decline and hollowing out of local economies. In order to enable inclusive development as stated in
the SDGs philosophy, it is essential to realize strong hopeful economies and to support the challenge ofraising productivity by motivated individual businesses with the support of regional financial institutions, etc. inorder to revitalize local economies in the future. In addition, JFC and the SPC assume part of the risks
associated with unsecured lending to SMEs under the CDS agreements with JFC contributes to thesustainable operation of regional financial institutions. Given the unavoidable need to rely on guarantees andcollateral for loans to SMEs, the support of unsecured loans provided through the CDS agreements withJapan Finance Corporation enables the provision of loans focusing on the business potential and growthpotential of SMEs, which is considered to play an important role in the development of SMEs. Looking at theactual size of CLO originations over the past three years, there has been a remarkable year-on-year increasein the amount of loans, indicating that there is a strong need for funds for SMEs under this scheme.

Use of proceeds categories as per SBP:☐

Affordable basic infrastructure☒☐

Affordable housing☒☐

Food security☐

Access to essential services(Financial Services)
Employment generation (through SME
financing and microfinance)
Socioeconomic advancement andPage 3 of 7

empowerment☐☐

Unknown at issuance but currently expected
to conform with SBP categories, or othereligible areas not yet stated in SBPs

Other (please specify):

If applicable please specify the social taxonomy, if other than SBPs:

2. PROCESS FOR PROJECT EVALUATION AND SELECTION
Overall comment on section (if applicable):
JCR evaluates that all of the selection criteria presented in the evaluation phase 1 for the use of proceeds tobe social projects with a high degree of social contribution, as discussed in evaluation phase 1. It is highly
transparent that the selection criteria take into account the environmental and social risks considered in theevaluation phase 1, and that the selection criteria are clearly disclosed in the annual securities report. In
addition, the Corporation has built a network of diverse sourcing routes and external experts in order toacquire, maintain, and manage high-quality properties.

JCR evaluates that the selection criteria are operated with validity, as the roles of each organization are
clearly divided and the decision-making process passes through a department with specialized knowledge.
These selection criteria and the selection and evaluation process will be published in this report to thelender at the time of individual funding.

Evaluation and selection☒

Credentials on the issuer’s social objectives☒☒

Defined and transparent criteria for
projects eligible for Social Bond proceeds
Summary criteria for project evaluationand selection publicly available

☒

☒

☐

Documented process to determine thatprojects fit within defined categories
Documented process to identify and manage
potential ESG risks associated with the project
Other (please specify):

Information on Responsibilities and Accountability☒☐

Evaluation / Selection criteria subject toexternal advice or verification
Other (please specify):☒

In-house assessment

3. MANAGEMENT OF PROCEEDS
Overall comment on section (if applicable):
The proceeds are used to bear the credit risk of loans to small and medium-sized enterprises, which aresubstantially underlying assets, through the CDS agreements. As the borrowers of the underlying assets,
SMEs repay the principal of their loan receivables on a monthly basis, the outstanding balance of the pool ofloan receivables during the securitization period decreases. As a result, the principal amount of the notes isalso redeemed and reduced according to the terms and conditions of the corporate bond memorandum andother agreements.
In addition, the use of credit risk in the pool of loan receivables whose underlying assets are the proceedsfrom the issuance of the notes iis clearly stipulated in the CLO agreement, and therefore tracking
management is not required.
Page 4 of 7

Transactions that the proceeds are deposited in the bank and substantially bear the credit risk of loan
receivables on small and medium-sized enterprises under certain conditions by covering losses under the
CDS agreements are clearly stipulated in the agreements. Therefore, it is considered that controls are
secured as long as businesses are conducted in accordance with the agreements.
Since the entire amount of the proceeds is allocated to the payment of the amount of compensation forlosses under the CDS agreements, there is no unallocated funds. In addition, in the event of prepayment of
the loan receivables to be backed, the notes will be redeemed in accordance with the water fall stipulated in
the corporate bond memorandum, etc., and therefore JCR evaluated that there is no need for reappropriation.
Tracking of proceeds:☒☐

Social Bond proceeds segregated or tracked by the issuer in an appropriate manner☐

Other (please specify):

Disclosure of intended types of temporary investment instruments for unallocated proceeds

Additional disclosure:☐

Allocations to future investments only☐☐

Allocation to individual disbursements☐☐

Disclosure of portfolio balance of
unallocated proceeds☒

Allocations to both existing and future
investments
Allocation to a portfolio of disbursements
Other (please specify):
Allocation to referred pool of loans of the CLO

4. REPORTING
Overall comment on section (if applicable):
JCR highly evaluates that JFC disclose social reference data of the referred pool of loans to SMEs andmonitor and report asset status monthly and quarterly.
In addition, JFC has been evaluated by the external experts committee to calculate the social outcomes of its
structured finance business.

Use of proceeds reporting:☐

Project-by-project☒

On a project portfolio basis☐

Linkage to individual bond(s)☐Other (please specify):☐

Social Bond financed share of total investment☐

Semi-annual

Information reported:☒Allocated amounts☐ Other (please specify):

Frequency:☒Annual☐ Other (please specify):

Page 5 of 7

Impact reporting:☐

Project-by-project☐

On a project portfolio basis☐

Linkage to individual bond(s)☒Other (please specify):
On a referred pool of loans basis

Frequency:☒Annual☐Semi-annual☐ Other (please specify):

Information reported (expected or ex-post):☒Number of beneficiaries☒

Target populations☐

Information published in sustainability report☒ Other ESG indicators (please specify):
Scale of SME borrowers, Outcomes from thissecuritization such as creation of production
amounts and Number of employment createdMeans of Disclosure☐

Information published in financial report☐

Information published in ad hoc☒ Other (please specify):
Information disclosed on JFC’s website
documents
Reporting reviewed (if yes, please specify which parts of the reporting are subject to external review):☐

Where appropriate, please specify name and date of publication in the useful links section.

USEFUL LINKS (e.g. to review provider methodology or credentials, to issuer’s documentation, etc.)
Website of Japan Finance Corporation
https://www.jfc.go.jp/n/english/operations.html
JCR’s Social Finance Evaluation Methodology
https://www.jcr.co.jp/en/greenfinance/

SPECIFY OTHER EXTERNAL REVIEWS AVAILABLE, IF APPROPRIATE
Type(s) of Review provided:☐

Second Party Opinion☐

Certification☐

Verification☒

Scoring/Rating☐

Other (please specify):

Review provider(s):Date of publication:

Japan Credit Rating Agency, Ltd.

February 4, 2020

Page 6 of 7

ABOUT ROLE(S) OF REVIEW PROVIDERS AS DEFINED BY THE SBP

1. Second Party Opinion: An institution with social expertise, that is independent from the issuer may
issue a Second Party Opinion. The institution should be independent from the issuer’s adviser for its
Social Bond framework, or appropriate procedures, such as information barriers, will have been
implemented within the institution to ensure the independence of the Second Party Opinion. It
normally entails an assessment of the alignment with the Social Bond Principles. In particular, it can
include an assessment of the issuer’s overarching objectives, strategy, policy and/or processes relating
to social sustainability, and an evaluation of the social features of the type of projects intended for the
Use of Proceeds.
2. Verification: An issuer can obtain independent verification against a designated set of criteria, typicallypertaining to business processes and/or social criteria. Verification may focus on alignment withinternal or external standards or claims made by the issuer. Also, evaluation of the socially sustainablefeatures of underlying assets may be termed verification and may reference external criteria. Assurance
or attestation regarding an issuer’s internal tracking method for use of proceeds, allocation of funds
from Social Bond proceeds, statement of social impact or alignment of reporting with the SBP, may also
be termed verification.
3. Certification: An issuer can have its Social Bond or associated Social Bond framework or Use of Proceeds
certified against a recognised external social standard or label. A standard or label defines specificcriteria, and alignment with such criteria is normally tested by qualified, accredited third parties, which
may verify consistency with the certification criteria.
4. Social Bond Scoring/Rating: An issuer can have its Social Bond, associated Social Bond framework or a
key feature such as Use of Proceeds evaluated or assessed by qualified third parties, such as specialised
research providers or rating agencies, according to an established scoring/rating methodology. The
output may include a focus on social performance data, process relative to the SBP, or anotherbenchmark. Such scoring/rating is distinct from credit ratings, which may nonetheless reflect materialsocial risks.

Page 7 of 7