Last Updated: March 29, 2007

Whole Business Securitization
1. Outline of Whole Business Securitization
A whole business securitization is a finance method backed by cash flows generated from “business”
itself (or sometimes including cash flows generated from asset sale, etc.) rather than backed by “assets”(accounts receivables, leases receivables, etc.). It has a hybrid nature which holds characteristics of both asecured corporate finance and an asset securitization. The underlying assets are the summation of theexpected cash flows generated from the business within a time limit of debt redemption, shares of stock of
the operating company, which is a collateral, and its primary assets (production facilities, marketingfacilities, etc.). A business, which is suitable for a securitization, has the following characteristics in manycases:(1) Its cash flows and earnings levels are high.
(2) Stabilities in business and its cash flows can be easily foreseen thanks to reasons such as a high entry
barrier and a large market share.
(3) It is not impossible that its business operator is replaced with a third party.
(4) Speed of changes is relatively mild in order not to lose timing of exercise of control and not toimpair effectiveness of monitoring by creditors.
2. General Scheme
The following measures are taken in order to ensure repayment of debts (bonds, loans, etc.) based on
cash flows from the business (predictable cash flows including those from future asset sale).
(1) Measures for bankruptcy remoteness are taken so that the business cannot easily caught up in legal
bankruptcy proceedings against sponsor corporation, with the business being separated from its
sponsor corporation.
(2) Measures to make it difficult to commence bankruptcy proceedings against the operating company(Opco) itself and measures to protect the creditors from the Opco bearing an unanticipated businessrisk are taken by restricting on business purpose and changes in organization such as merger orcompany split-off, causing therefore the Opco itself to become close to a kind of SPC (a specialpurpose company specializing in the business) in terms of nature.
(3) A vehicle (SPC or trust) for fundraising is established, and measures for bankruptcy remoteness andmeasures for prevention of a commingling of cash flows are taken here also.
(4) Arrangements, in which incentives and penalty are included so that cash flows from the business aregenerated stably as close to initial cash flow projection, are made.
(5) In consideration of a case where profitability of the business falls below the projection, a scheme,
which allows a continuation of business, and an appointment of successor are arranged in order to1/3
http://www.jcr.co.jp

ensure continuity of the business.
(6) Liquidity facility or hedge against market risk (interest rate or currency) is arranged in order not to
impair the continuity of the business as a result of temporary liquidity risk or refinance risk.
3. Rating Points(1) Framework of rating analysis consists of the following:(i)Analysis of the business.

(ii) Analysis of the robustness of the whole scheme from the point of view of legal matters andeconomic feasibility.
(iii) Analysis of cash flows from the business.
(iv) Analysis of problem area inherent in a whole business securitization and countermeasuresagainst it.
(v) Assessment of asset sale in cases where such sale is scheduled for future cash flows.
In making an analysis (i) above, JCR makes analyses of external factors such as trend of business, its
characteristics, industry structure, and competitive environment and internal factors such as positioningof the business, competitive strength, composition of sales or channels, managerial capability, businessplan, asset value or leverage for each in detail.
(2) JCR assumes the following risks in addition to the matters to be kept in mind in securitization such asmeasures for bankruptcy remoteness for SPC, etc. and legal isolation from sponsor, and makes
analyses of their impacts on debt redemption:(i)

Lower cash flows from the business and measures for this risk.

(ii) Lower entry barrier, and lower margin as a result of competition.
(iii) Continuity of the business relies on the initial business operator or sponsor, and therefore riskof being influenced by it (them).
(3) In Japan, there are no such systems as a floating charge in the U.K. In corporate reorganization
proceedings, risks such as limitations on exercise of a security interest or cancellation of a contract bya trustee are envisaged, and it is considered difficult to take a legally complete measure for bankruptcy
remoteness. Therefore, even if there is a possibility that a petition for bankruptcy or corporate
reorganization proceedings might be filed, measures to make its probability as small as possible byseveral policies including limitations on creditors are taken. JCR considers it necessary to examine
robustness of the scheme in terms of legal aspect and economic feasibility together.
(4) In consideration of the characteristics of the business risks inherent in it, needs for periodic monitoringof the business movements, and in cases where its business performance is slumping, needs formonitoring of progress in its taking measures, having it take measures step-by-step in accordance with
2/3
http://www.jcr.co.jp

the slumping conditions, become higher than in the case of ordinary type of asset securitization.
4. Principal Required Materials(1) Materials on the Opco and the business (industry trend, business plan, financial statements, etc.)(2) Materials on originator (sponsor) (financial statements, etc)
(3) Materials on scheme (term sheet, legal opinions, tax opinions, etc.)
Reference Report: “Whole Business Securitization and Act on Special Provisions of the Civil Code in
Relation to Requirements for Perfection of Transfer of Movables and for Assertion ofAssignment of Claims”
http://www.jcr.co.jp/rat_stru/pdf/20051101_s15.pdf

3/3
http://www.jcr.co.jp