Last Updated: June 2, 2014

Leases1.

Outline of Claims Subject to the Securitization
Lease receivables are originated from a contract under which a lease company purchases properties tobe used by a client company, such as information equipment, industrial machinery, machine tools, medical
devices, and in-store facilities, and leases them to said company. One particular feature of thesereceivables is that, unlike installment receivables, their term is generally long. There are finance leases
and operating leases, and this document covers the former. Those involving vehicle leasing are treatedseparately as auto lease receivables (Please refer to “Automobile Leases”).

2.

Outline of the General Scheme (in case of the Trust Method)(1) A lease company being the originator assigns its lease receivables from numerous underlying debtors
to a trust bank (trustee) to raise funds1.
(2) The originator assigns its lease receivables in trust to the trustee and the trustee issues preferredbeneficiary interests and subordinated beneficiary interests.
(3) The originator retains the subordinated beneficiary interests and transfers the preferred beneficiaryinterests to investors to raise funds.
(4) When assigning the lease receivables in trust, the originator fulfills the requirements for perfection
against third parties by making the registration as stipulated in Article 4, Paragraph 1 of Act on
Special Provisions, etc. of the Civil Code Concerning the Perfection Requirements for the Assignmentof Movables and Claims. The originator’s fulfillment of the requirements for perfection against
debtors will be reserved until any event of the servicer’s default occurs.
(5) Based on the entrustment operation commission contract, the originator first acts as the servicer forcollecting lease receivables, and delivers (pays) the collected proceeds to the trustee every month.
During the collection period, the trustee redeems the principals of and pays the dividends on preferredbeneficiary interests using the collected proceeds.
(6) In case that the originator fails to pursue normal servicing operations, the backup servicer stands by
from the very beginning2.

1

In the case where a lease company securitizes its retaining claims for the proceeds of installment sales to corporate
customers only or in the case where a lease company securitizes its retaining claims for the proceeds of installment
sales to corporate collectively with lease receivables, the same credit rating method of lease receivables is applied toeither case.
2
There are some projects in which no backup servicer is arranged at the beginning.
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<Scheme Map>
Backup Servicer
Debtors
Collected proceedsof lease receivables

Lease contracts

Backup Service Contract
Assignment of lease receivables
Trust Beneficiary Right

Originator/Servicer

Trust Bank (Trustee)

Delivery of collected proceeds

Payment oftransfer proceeds

Transfer of preferredbeneficiary rights

Redemption of preferred beneficiary rights andpayment of dividends on preferred beneficiary rights

Investors

In recent days, cases of “Trust ABL Scheme” are increasing, in which upon entrustment of
securitizing assets, a total or a partial amount of the preferred beneficiary interests shall be repaid withthe proceeds of the borrowing against the trust assets, and especially such cases adopted so-called“One Person Beneficiary Scheme”, consisting from a ABL (Asset Backed Loan) and a subordinatedbeneficially interests, are increasing.
3.

General Waterfalls(1) Collection of receivables from debtors
The originator credits the proceeds of the receivables in trust as collected from the first day to thelast day of each month at the end of the next month to the account opened in the name of the trustee forthe delivery of the collected proceeds.
Collection ScheduleCollection schedule(from the first day to the last day of each month)First day

Last dayCollection conditions
confirmation date

20th day

Last dayCollected proceeds
delivery date(2) Normal time
The trustee pays various charges including taxes and public charges as well as trust fees from theinterest equivalent amount out of the collected proceeds received from the originator. From theremaining amount, the trustee pays the dividends on preferred beneficiary interests. With the residual
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amount in full, the trustee pays the dividends on subordinated beneficiary interests. The trustee repays
the amount scheduled for the redemption of principals of the preferred beneficiary interests from theprincipal equivalent amount out of the collected proceeds. With the remaining amount, the trustee
redeems the principals of subordinated beneficiary interests. However, a minimum retention amount is
set for the principals of subordinated beneficiary interests, so the trustee retains the principals of thesubordinated beneficiary rights equal to or more than a certain amount of money. The residual amountof the collected proceeds unused for the redemption of principals of subordinated beneficiary interests
is reserved and it is allowed to make the amount of money available as the resources for theredemption of the principals of subordinated beneficiary interests in the next month and thereafter.
(3) Accelerated redemption time
The trustee pays various charges including taxes and public charges as well as trust fees from theinterest equivalent amount out of the collected proceeds received from the originator. From theremaining amount, the trustee pays the dividends on preferred beneficiary interests. From the principal
equivalent amount and the interest equivalent amount after having paid the dividends on preferredbeneficiary interests, the trustee redeems the principals of preferred beneficiary interests. Until all
preferred beneficiary rights are redeemed in full, any payment of the dividends on subordinatedbeneficiary interests and any redemption of the principals of subordinated beneficiary interests will besuspended.
4.

Risk Assessment for the Securitization of Lease Receivables(1) Risk of delay in collection of the proceeds from the underlying receivables
In securitized products, any redemption of principals and any payment of interest (dividends) on adue date as scheduled entirely depends on the collection conditions of proceeds from individual
debtors and so shortage of funds may possibly occurs on a temporary basis and no payment ofprincipals and interest may be made on a due date as scheduled depending on the delinquent conditionsof individual debtors and on the conditions of pursuing collection operations by the servicer.
In response to such risk, liquidity enhancement measures with cash reserves and credit
enhancement measures by a senior-subordinated structure are taken.
(2) Risk involved in defaults of individual debtors
If default rate of asset pool emerges in securitized products at a rate equal to or more than a certain
level, the principals of the securitized products may possibly be damaged by such defaults.
Against this risk, credit enhancement is made by a senior-subordinated structure corresponding toindividual credit ratings. (See Section 4 Calculation of an amount of money necessary for thesubordination.)

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(3) Risk involved in the originator’s bankruptcy, etc.
In the originator’s bankruptcy, civil rehabilitation, or corporate rehabilitation proceedings, there isa risk that the relevant court or receiver (administrator) may judge the claims transferred by
securitization as the claims or the security rights belonging to the bankrupt estate, the rehabilitation
debtor’s property, or the rehabilitation corporate property and as the claims or security rights subject tothe bankruptcy, civil rehabilitation, or corporate rehabilitation proceedings. (This is the so called
problem “true sale”.)
Major focal points in terms of credit ratings are cited below:
i. It has already been confirmed whether or not the originator has an intention of transferring its
receivables. The originator’s intention of transferring its receivables has already been approved
according to the internal procedures.
ii. The originator has no control rights, except that it has the rights and obligations as the subordinatedbeneficiary and as the servicer.
iii. Except in the case of occurrence of certain events3, the originator has neither obligation nor right torepurchase the transferred receivables.
iv. With regard to the transfer of the receivables in trust from the originator to the trustee, therequirements for perfection against third parties have been fulfilled. In case of occurrence of any
cause for replacing the servicer including the originator’s deteriorated creditworthiness, therequirements for perfection against debtors have been fulfilled.
v. The originator renders no indemnification for solvency of individual debtors.
vi. The selling/buying price of the receivables between the originator and the trustee has been
determined based on the fair prices.
(4) Risk involved in bankruptcy, etc. of the originator doubling as the servicer
When its claims are securitized, the originator often concludes an operation commission contract
with the trustee to whom the claims have been assigned, on the basis of which it pursues collection
operations by continuing the collection method as has been practiced by it. In this case, however, if any
bankruptcy proceedings such as civil rehabilitation, corporate rehabilitation have been commenced byor against the originator, the collection operations may possibly be confused and suspended on atemporary basis.
In response to this risk, liquidity enhancement measures are implemented and a scheme isestablished to ensure that the collection operation commission contract with the originator can becancelled and the backup servicer can take over the collection operations with the approval of thetrustee, etc.
3

Cleanup calls, violation of representations and warranties, violation of the conditions for qualification, othercontractual violations, etc.
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(5) Risk involved in the case where the requirements for perfection against debtors are not fulfilled
In many cases of securitizing lease receivables, the originator fulfills the requirements for
perfection against third parties by making the registration as stipulated in Act on Special Provisions,etc. of the Civil Code Concerning the Perfection Requirements for the Assignment of Movables andClaims, while the requirements for perfection against

debtors are reserved at the beginning. If theoriginator falls into bankruptcy by any chance, collected proceeds to be received by the trustee, etc.
from the debtors may possibly decrease because the originator does not have the requirements for
perfection against debtors.
In response to this risk, the provisions are set forth to ensure that the originator will promptly
fulfill the requirements for perfection against debtors using the method as stipulated in the above Act
or in the civil code in case of occurrence of any cause for replacing the servicer including theoriginator’s deteriorated creditworthiness.
5.

Calculation of an Amount of Money Necessary for the Subordination(1) Risk of deteriorated creditworthiness of underlying debtors
In pursuit of securitizing lease receivables, claims inappropriate for the securitization are excluded
from all the lease receivables retained by the originator to make the pool of parent claims, from which
the pool of claims (transferred claims) subject to the securitization is extracted. The pool of transferredclaims generally consists of no less than 300 underlying corporate debtors with a maximum
concentration ratio of one debtor group limited to about one percent. In the case of the pool ofwell-dispersed claims, the amount of losses expected to arise from defaults of the underlying claims is
calculated by the approach of large number small lots using the law of large numbers.
The securitization obtains a base case to be applied when confirming and analyzing thedevelopment of credit loss percentages and that of delinquency percentages using the historical data ofparent claims. Based on the average value of historical data and with overall considerations on trends
and irregular values from the past, confirmed items at a due diligence meeting, macro data on leasemarkets, and other factors, each parameter is adjusted to such a level as nearer to the performance ofthe pool of claims subject to the securitization, whenever appropriate4. After the replacement of theservicer, if collected proceeds due to cancellations before the maturity of the lease contracts are
expected to fall below the remaining lease fees, the securitization sets a base case of losses arisingfrom the cancellations before the maturity based on the historical data of parent claims and confirmed

4

When extracting transferred claims, they are filtered by the conditions for qualification and so the claims extracted fortheir securitization become superior to parent claims. The credit loss ratio of the securitization pool (pool oftransferred claims subject to securitization) is expected to become lower than the historical data of parent claims. On
the other hand, the number of debtors in the pool of transferred claims is smaller than that of the pool of parent claims(in other words, the degree of dispersion of the former is lower than that of the latter.) The concentration ratio of theamount of money for one debtor of the former becomes higher than that of the latter and the impact of credit losses
from one debtor of the former becomes heavier than that of the latter.
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items at the due diligence meeting.
Then through a stress test, the securitization gives rise to credit losses, delinquencies, andcancellations before maturity by putting a certain stress on expected cash flows during period.
Thereafter the securitization obtains the amount of the subordination necessary to get the targeted
credit rating. The following stress magnifications are basically applied according to the attributions andtargeted credit ratings of underlying debtors. However, as a result of confirmation of attribution dataand historical data beginning with a comparison of composition ratios of the attributions (including
capitals, regions, business categories, classifications of lease properties, etc. of underlying debtors)
between the parent claims and the transferred claims, if it is determined that the transferred claims areinferior to the parent claims in creditworthiness, the securitization sometimes adds additional stress.
AAA

Fivefold ~AA

Fourfold ~A

Threefold ~The stress test usually verifies the possibility of repayments based on the assumption of the worst
case in which a credit event occurs on the part of the originator doubling as the servicer at any point intime after the commencement of securitization and accelerated redemption begins. The following isoften used as part of the efforts for the securitization scheme: A minimum retention amount of theprincipals of subordinated beneficiary interests is set during a period for fear that excessive
withdrawals of subordinated beneficiary interests by the collected proceeds due to cancellations before
maturity take place with the cancellations before maturity continuing at a high level.
In the case of lease receivables, a maximum ratio of the amount of money for one debtor is set todisperse them when extracting transferred claims. However, as underlying claims are redeemed, thenumber of debtors decreases. As a result, the impact of creditworthiness of the debtor that tops the listof remaining debtors sometimes increases. It is required to verify such dispersion degrees and changesof the attributions.
(About Historical Data)
As requisite data, the following data shall be procured, i.e. historical data about the delinquency,
delay and cancellation in the pool of parent claims, and also attribution data regarding to a consistingratio of the amount, term, size of the capital of the debtors with respect to both of the pool of parent
claims and the pool of securitized assets. 5 years historical data are preferable, but if not available,
available data of the longest term shall be supplemented with a due diligence meeting or other data
provided by the originator.
JCR opines that the risk parameter to be used for the analysis of large number small lots should beobtained in principle from the historical data. In such cases, for the use of the historical data, JCR shall
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process the data or modify the definition so as to fit to the actual conditions through a hearing to theoriginator. But even as the above, if a gap is still considered to exist, it is examined to use the historical
data which was used in the past securitizing products by the identical originator. If those data areconcluded to be sufficient enough for the data analyses, by referring to the relevant data, a base case,whose performance becomes a premise for the analyses, shall be deduced(2) Commingling risk
When the originator becomes bankrupt at any point of time after the commencement of
securitization, a maximum amount of money expected to be un-collectable is determined to be theamount of money necessary for the subordination for response to the commingling risk as a general
rule. The period during which the collected proceeds are commingled with others is determined to be
two months in many cases, but it is calculated according to the remittance schedule of collected
proceeds of securitization products subject to the credit rating.
(3) Cash reserves (liquidity enhancement)
When the originator doubling as the servicer falls into difficult situations that disable
implementation of normal collection operations due to bankruptcy and any other reasons, cash reserves
make up the major funds as required during the period until the originator hands over the collection
operations to the backup servicer and collected proceeds are credited again to the trust bank (trustee)
and to the SPC. A necessary amount of money is estimated as follows.
(a) An amount of money necessary for liquidity enhancement (the securitization of lease receivables
sets aside an amount of money equivalent to the lease fees for more than three months.)·

Interest and dividends on securitization products·

Trust fees or maintenance fees of the SPC, as well as taxes and public charges·

Backup service fees (level of fees after the change of the redemption method)(b) An amount of money as required when the servicer is replaced (payment in a lump sum)·Fees for preparing and sending notices of the replacement of the servicer·

Fees for obtaining and sending the certificate of registered matters·

Fees for taking responses to the system and for establishing a call center when the servicer isreplaced, and so on(c) An amount of money required for others·

Automobile tax, automobile weight tax, automobile liability insurance premiums, andvoluntary insurance premiums (in the case of car leasing/installments)·

Commitment fees required when the backup servicer is arranged (when taking responses
using cash reserves) in the case of no arrangement of the backup servicer at the beginning

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6.

Other Issues(1) Initial reserve of the subordination for responses to the commingling risk(a) Rating Trigger for responses to the commingling and Measures when the Trigger is pulled

When the originator fulfills the requirements as stated in the table below, by setting forth
rating triggers, it incorporates such provisions which waive subordination for response to thecommingling risk until it breaches such provisions.
Table: Triggers for response to the commingling
Relevant Originator

In principle, at the time of arranging securitizing products, a non-bankfinancial institution to which “A” range or higher Long-term Issuer
Rating is assigned by JCR. In this initial criterion, the possibility is notforeclosed that qualitative factors are taken into account like the trigger
criteria (b) below.

Rating Trigger(1) When the Long-term Issuer Rating of the originator falls to “BBBflat” and the outlook of the rating becomes “Negative”(2) When the Long–term Issuer Rating of the originator falls to “BBB
minus” or lower(3) When the Long–term Issuer Rating of the originator is withdrawn

Measures when the

Advancing an additional amount in response to commingling loss

rating trigger is pulled

within 30 days as stipulated in the initial contracts, or making advancepayments for the amount which JCR allows in accordance with thereceiving schedule of the collection of money

The trigger standard is basically “BBB” or higher. Concerning the notch of credit rating,however, the possibility is not foreclosed that a different notch is set for the trigger standard with acomprehensive judgment made on the individual factors as described below.
· Dependence on securitization in terms of fund raising by an originatorIf an originator’s fund raising depends on securitization to a high degree, a higher-level
trigger may be applied to the originator in view of its ability to procure funds at the time of
conflict of the trigger standard.
· Other factors: qualitative evaluation of the factors including an originator’s business bases andshareholders as well as supports from its group companies.
This is a scheme to reserve subordinated portion for response to the commingling risk under acertain condition. The commingling risk will be possibly occurred when the originator acts as aservicer in the case of the securitization where the originator is a non-bank. This is based on the
judgment that the probability of an abrupt bankruptcy of the originator is small, if it is concluded
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that the originator maintains a certain level of creditworthiness.
(Please refer to “Commingling Risk Pertaining to Securitization Products”)(b) The calculation of the requisite ratio of the subordination when triggers are incorporated for

response to the commingling risk
In a large number small lots approach, it is assumed that the difference of attributions of theoriginal debtors, which constitutes of the pool of lease receivables for the subject analysis, shall be
negligibly small. On the other hand, in the pool of the actual lease receivables, among the original
debtors, the degree of concentration to the upper bracket in term of the amount is high. Therefore it
does not meet in a strict sense to the assumption of a large number small lots approach (though it
varies depend on cases, in the most cases, the maximum limit of the concentration to the upper
bracket is 1% of the pool of the original claims). In the case where triggers for response to thecommingling risks are set forth, the amount of subordination can be small compared with the caseof non-trigger. Therefore assuming an extreme case where defaults occur to the original debtors
who belong to the upper bracket and taking into account the concentration ratio to the upper bracket,
another subordination shall be provided for response to the cases when defaults concentrates to theupper bracket debtors, if necessary.
(2) No arrangement of the backup servicer at the beginning

It is the basic handling for the securitization to arrange the backup servicer from the very
beginning. However, when the credit rating of an originator doubling as the servicer is equal to or
higher than “A minus”, it is exceptionally allowed to make no selection of the backup servicer at the
beginning, provided that the trustee has an ability to select a new backup servicer and actually selects a
new backup servicer at the stage where the originator’s credit rating falls into Range “BB”.
In any securitization issue that arranges no backup servicer, it is necessary to increase cash
reserves (for liquidity enhancement) by the amount of commitment fees necessary for the arrangementof the backup servicer, or to take other responses including an additional obligation of cash in trust for
the equivalent amount, an increase in the reserved amount of the subordination, and so on.
(Please refer to “Backup Servicer in Securitization”)(3) Comfort Letter and Legal Opinion

As to a comfort letter and legal opinion, it is a requisite condition for rating that the original or
copy of the comfort letter or legal opinion should be received at each time when a securitization isarranged.
As to the eligibility of securitizing claims, it shall be confirmed by the “Representations and9/11
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Warranties” expressed by the originator in the claims assignment agreement or trust agreement.
7.

Monitoring and Review(1) Monitoring
The issue, to which rating is assigned, shall constantly be monitored with monthly performance
reports etc. until the securities shall be redeemed.
(a) Monitoring the situation of backed assets (Claims)
Procuring servicing reports from the originator or reports from the operation administrator
monthly or quarterly, JCR shall monitor the situation of the backed assets by gauging a delinquent
rate of each case. When a high delinquent rate continues and if it is needed, then JCR may conduct
a special review taking the hearing of the originator into account.
(b) Ratings of the related Parties
As a result of change of ratings of the related parties, it shall be confirmed if any concerning
factors arise. And also it shall be checked whether the situation falls into breaching the several
triggers such as appointing a backup servicer, replacing swap counter parties and altering bankaccount of collection money and etc.
(c) Monitoring a Statement of Accounts of the related Parties
In principle once a year, JCR procures annual statements of account from the originator (incase of no rating assigned by JCR) and SPC (in case of utilizing SPC scheme) and it shall be
confirmed if any concerning factors arise with respect to the creditworthiness of the related parties
or if any situation falls into breaching the triggers.
(2) Review
As regards the long-term issue that is due in 1 year or more, JCR holds a rating committee on aregular basis and decides to affirm, revise or put it under the credit monitor. When deemed necessary,
JCR conducts an ad hoc review for any of such issues and makes a decision in the same manner. When
conducting the review of credit ratings, JCR reexamines, as necessary, the base rate and other rating
assumptions in light of the performance of underlying assets and economic conditions and analyses
cash flows based on these assumptions with due consideration given to the remaining term of
securitization products.
Prior to this procedure, JCR receives necessary information and materials from the originatorand/or the arranger and collects other information required for the review. Where necessary, JCR visits
the originator regularly to hold a review meeting (interview) even after its first visit prior to the initial
rating action.
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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 or
warranty, 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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