Last Updated: August 28, 2012

Commingling Risk Pertaining to Securitization Products
1. Introduction
A benefit of funding by securitization is that a structure backed by only cash flows from assets
assigned appropriately to an SPV (“true sale”) with bankruptcy remoteness can allow an originator toobtain financing without depending on its creditworthiness. While, in usual, simple assignment of money
claims separates credit risk of an assignor from an assignee by transfer of ownership of its assets, inarrangement of securitization transaction, utmost attention is paid to eliminate elements that can threaten
validity of the asset transfer, which is a prerequisite for a securitization product, in advance so that legal
grounds of the validity cannot be questioned when the assignor, that is, originator, goes bankrupt. Namely,
it is generally considered that risks that can be eliminated by measures at the time of structuring should beeliminated as much as possible beforehand for investors for monetary claims who take a credit risk (acertain level of credit enhancement is provided by way of senior-subordinated structure usually) ofassigned assets as an aggregate.
Another important issue to prepare for bankruptcy of originator is commingling risk. It is true that itis desirable that the originator continue its service as a servicer after assignment of its claims to SPV ingeneral in light of cost and effectiveness of collection as long as the originator wishes to continue its
relations with debtors who are customers in its business and the originator continues its business as before.
From this perspective, the originator keeps in touch with the debtors after assignment of receivables
usually as an agent for servicing (administration and collection) operation. The originator's position will
not change in appearance.
In exchange for this smooth administration and collection operations after assignment of claims insecuritization, when the originator goes bankrupt, there is a risk that the collected money from the claims
that should belong to SPV or investors eventually will commingle with the originator's inherent cash. As aresult, it has been generally thought that it is necessary to take into consideration that SPV might become
unsecured general creditor with only right to claim for delivery of collected money against the originatorin the worst case scenario. In practice, there has been subordination (credit enhancement) for comingling
risk (which depends on collection schedule of securitization schemes, but is often set as an amount ofmonthly collected money for two months in case of lease receivables) in response to collected money
assumed to stay in the hands of the originator in addition to subordination

for debtors’ default risk in thealmost all securitization cases of monetary claims, to which JCR has assigned ratings to date. Bearing inmind the above, JCR made public a report on this issue in April 2006 and then introduced a rating trigger
for commingling risk to securitization transactions, in which a nonbank financial institution was theoriginator, after reexamining measures under the structure and scenarios assumed at the time of theoriginator’s bankruptcy.
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2. Rating Trigger for Commingling Risk
Evaluation on probability of redemption of securitization products should be a matter of probability
essentially. From this perspective, it is a generally accepted way of thinking that scenario analysis should
be relied only on quantitative decisions and that it is necessary that this analysis be separated from
qualitative factors. For this reason, it is true that a measure for commingling risk, which is an event that isdifficult to be predicted for the happening beforehand, was required to be taken before as an event that
can happen always in case of originator’s bankruptcy. However, there is room to reconsider a conclusionthat it is completely impossible to add any decisions on status of an originator after the originatorsecuritizes its claims.
It is still difficult, however, to evaluate a probability of occurrence of this event as mentioned above.
If subordination for commingling risk is not set at the beginning and the rating on the originator lowers
later, such subordination needs to be set up. Otherwise, JCR cannot make the same decision on rating on
the securitization product as before. JCR examined carefully whether or not JCR can set differences inrequirements at the beginning when rating securitization products by way of JCR’s evaluations on things
centered on rating on originator itself and came to the following conclusions.
(i)

In case where a rating higher than a certain level is assigned to an originator, it is less likely that theoriginator goes bankrupt during securitization time horizon even if its creditworthiness worsens or its
rating can be downgraded with a certain probability.

(ii) When a rating on an originator is downgraded, as long as the originator remains at a certain level ofrating (Rating Trigger for Commingling Risk), it can be forecast that liquidity that will be required tobe contributed pertaining to the securitization product is sufficient at that time.
(iii) For an originator, to whom a certain level of rating is assigned, at time of creating a securitization
product, it is normal that JCR judges that the originator has competitive advantage in operating base,etc. over others in its industry. In this case, even if the originator goes bankrupt for some reasons, itis relatively less likely that one-sided proceedings ignoring rights of the securitization productinvestors will be taken. There are cases where JCR can evaluate a probability of an amicablesettlement following a precedent in the rehabilitation-type proceedings. JCR thinks, however, that itis difficult for JCR to incorporate such probability into the rating in effect.
The above standards are based on JCR’s views that it is possible to take an approach to reservation at
the beginning pertaining to commingling loss that cannot reach a level affecting a rating on asecuritization product by way of JCR’s decisions on the originator at each point before occurrence ofcommingling loss upon the originator’s bankruptcy. Specifically, JCR allows an originator to reserve
setting up subordination for commingling risk until it hits the rating trigger for commingling risk by wayof setting up such rating trigger, if the originator can meet requirements for the standpoints below.
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(1) Originator, to Which Trigger Applies
JCR sets a standard for an originator, to which this trigger applies, that such originator should be anonbank financial institution in principle, which receives a certain level of Long-term Issuer Ratingfrom JCR at time of creating a securitization product. In principle, JCR assumes corporations withratings in the A category and higher than this category. An opinion that it is less likely that a corporation
will go bankrupt if it has a certain level of rating at the beginning lies behind this standard. Additionally,
this standard reflects that JCR judges that it is less likely that such originator will have to offer asubordination amount later for commingling risk that is reserved at the beginning in the event of hitting
the trigger later described below. JCR does not exclude a possibility that qualitative factors such as
factors as shown in (2)-(ii) “Setting of Trigger Standard” can be taken into consideration for this initialstandard.
(2) Setting of Trigger Standard
In an originator’s securitization, to which the above applies, JCR sets the rating trigger forcommingling risk when “Long-term Issuer Rating on the originator becomes BBB or lower with
Negative outlook in principle.” When this trigger is hit, additional contributions for commingling loss
need to be made within 30 days as agreed at the beginning or the originator shall pay an approved
amount of money by JCR in advance in response to schedule for collected money. While the standard
for this trigger is BBB rating in principle, JCR judges a notch difference in a comprehensive way inaccordance with the following individual factors and does not deny that such difference might be set.
(i) Degree of Reliance on Securitization in an Originator’s Funding Activity
When an originator’s reliance on securitization is high, it is likely that higher level of trigger will beapplied in view of the originator’s funding ability at the time of its hitting the trigger.
(ii) Other qualitative factors such as business base and support from shareholders and group companies.
In case where ratio of an amount of temporarily collected money staying in the hands of theoriginator to the issue amount of securitization product is extremely high (for example, in case ofmonthly clear credit card receivables), the above standard may not apply.

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Because of the possibility of human or mechanical error as well as other factors in the information herein, JCR makes no representation orwarranty, express or implied, as to accuracy, results, adequacy, timeliness, completeness or merchantability, or fitness for any particular purpose,with respect to any such information, and is not responsible for any errors or omissions, or for results obtained from the use of such information.
Under no circumstances will JCR be liable for any special, indirect, incidental or consequential damages of any kind caused by the use of any suchinformation, including but not limited to, lost opportunity or lost money, whether in contract, tort, strict liability or otherwise, and whether suchdamages are foreseeable or unforeseeable. Information herein is statements of opinion, and not statements of fact as to credit risk decisions or
recommendations regarding decisions to purchase, sell or hold any securities such as individual bonds or commercial paper. JCR retains all rights
pertaining to this document. Any reproduction, adaptation, alteration, etc. of this document, is prohibited, whether or not wholly or partly, without
prior consent of JCR.

Japan Credit Rating Agency, Ltd.
Jiji Press Building, 5-15-8 Ginza,Chuo-ku, Tokyo 104-0061, Japan
Tel. +81 3 3544 7013, Fax. +81 3 3544 7026

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