JCR in Japan - JCR Eurasia Rating · SMERA Ratings Limited INDONESIA PT PemeringkatEfekIndonesia (PEFINDO) JAPAN ... (Methodology, Industry, Country) Direct Access to JCR analysts

Introduction to Japan Credit Rating Agency (JCR)

May-Jun 2018

JCR in JapanJCR in Japan

2

Use of JCR Rating in Japan

- Nomura BPI (Bond Price Index)- Investment Guidelines (e.g.

GPIF)- BOJ Bond Purchase Program - ECAI for 85% of Japanese

Regional Banks- Tokyo Pro-bond Market (Eligible

CRA for Rating Requirement)

1. Established by Japanese institutional investors in 1985

2. Trust earned over 30+ years of credit rating services

3. Highest rating coverage for Japanese companies

JCR Rating = Benchmark for Japanese Investors

JCR in the WorldJCR in the World

3

NRSRO

Certified CRA

Registered CRA No.1

= Chair

Outline

4

Contents Page

1. About JCR 5

2. About JCR Rating 17

3. JCR’s Rating Coverage 28

4. JCR’s Green Bond & Social Bond Evaluation 43

5. Bond Market and Bond Investors in Japan 49

1. About JCR – Company Profile

5

Name Japan Credit Rating Agency, Ltd. (JCR)

Establishment 1 April 1985

Headquarters Jiji Press Building, 5-15-8 Ginza, Chuo-ku, Tokyo 104-0061 Japan

Shareholders Widely dispersed among 86 shareholders mostly consisting ofJapan’s institutional investors (see below) and 2 news agencies:- 15 Insurance companies- 5 Nationwide banks- 56 Regional banks

Board of Directors

• Shokichi Takagi, President and CEO• Yoichiro Yokoyama, Director• 3 non-executive directors

Main Business Areas

• Credit Rating• Research• Publication and Information Services

Regulatory Recognition

• Japan – Credit Rating Agency (CRA) registered with FSA• US – Nationally Recognized Statistical Rating Organization (NRSRO) registered by US SEC• EU – CRA certified by ESMA• Thailand – Approved foreign CRA certified by Thai SEC• Indonesia – Recognized CRA by Bank Indonesia for BI Regulation for Private External DebtECAI status: Japan, Hong Kong SAR, Turkey and the EU

Mission & Code of Conduct

6

Mission1. Contribute to the development of free, fair and transparent capital markets2. Be a prominent leader in credit evaluation in Japan by being

• fair and open to all stakeholders; and• independent and objective

3. Produce fair and quality analysis and provide credible and consistent rating information

Principles1. Look for the tides rather than the ripples2. Refrain from taking advantage of or recklessly accelerating market movements3. Behave with a recognition that credit ratings are public goods 4. Pay due attention to local context and accept diverse values

Code of Conduct 1. Quality and Integrity of Credit Rating Process2. Independence and Avoidance of Conflicts of Interest3. Officers and Employees’ Independence and Avoidance of Conflicts of Interest4. Disclosure of Credit Rating Information5. Treatment of Confidential Information6. Disclosure of JCR’s Code of Conduct and Communication with Market Participants

(Source) https://www.jcr.co.jp/en/criterion/

Rating Pioneer in Japan

7

Rated Financial Instruments by JCR2005 2010 2015

Corporate Finance (Bond, Loan)Restructuring, Exit-financeLeveraged Buyout (LBO)

Hybrid SecuritiesWBS, Project Finance

Asset Based Lending (ABL)Ship Financing

Cross-border LoanFund

FIs' Capital InstrumentsAviation Finance/EETC

Future Cashflow SecuritizationListed Infrastructure Fund

TLAC InstrumentsGreen Bond 1/

Infrastructure FundSocial Bond 1/

1/ Evaluation (not Credit Rating)

Investor Services

8

Website (www.jcr.co.jp/en)

“Rating-Eye”

“J-CRIS”

Bloomberg

Reuters

JIJI Press

Capital IQ

Website:Monthly viewers at around 30,000

• Subscription Service: Rating Eye• Database Service: J-CRISSubscribers:

Authorities, Public Sector Bank, Nationwide Bank, Regional Bank, Credit Union, Foreign Bank, Investment Bank, Insurance Company, Pension Fund, Mutual Fund, Asset Management Company, Real Estate Company, Manufacturing Company, Energy Company, Money Market Dealer, Auditor, etc.

JCR Rating in Investment Criteria

9

AAAAA+AAAA-A+AA-

BBB+BBBBBB-BB+BBBB-B+BB-

CCC

Nomura BPI (Bond Price Index)• Index of JPY denominated bonds issued in

Japan (including Samurai)• With “A range or above” rating from either

JCR, Moody’s, S&P or R&I

(Source) Nomura Securities, Bank of Japan, GPIF, NPFA

Government Pension Investment Fund (GPIF) –Investment Policy• Benchmark – Nomura BPI• Corporate bonds to be

invested must have a rating of “BBB range or above” either from JCR, Moody’s, S&P, Fitch or R&I

• If the rating is downgraded below BBB-, such bonds shall be sold.

BOJ’s Bond Outright Purchase• With “BBB range or above”

rating from either JCR, Moody’s, S&P or R&I

• Remaining maturity: 1-3 yearsNational Pension Fund Association (NPFA) –Investment Policy• Benchmark (Bond) –

Nomura BPI & Citigroup World Government Bond Index

Nomura DC Domestic Bond Index Fund (Mutual Fund) –Investment Policy• Benchmark – Nomura BPI

10

85% of Japanese Regional Banks adopt the Standardized Approach for CAR calculation under Basel II framework. JCR is an External Credit Assessment Institution (ECAI) for all of those banks.

Risk Weight for Standardized Approach under Basel II in Japan1/2/ Sovereign 3/ MDB Financial Corporates

Institutions 4/AAA～AA- 0% 20% 20% 20%

A+～A- 20% 50% 50%BBB+～BBB- 50% 100%

BB+～BB- 100% 100% 100%B+～B- 100% 100%

CCC and below 150% 150% 150%Unrated 100% 50% 100% 100% 5/

1/ Use of unsolicited ratings are prohibited except for sovereign.2/ If there are multiple ratings, adopt the risk category of the second highest rating.3/ Bond issued by the Japanese government and municipalities is weighted 0%.4/ Based on sovereign ratings of the entity incorporated.5/ 150% if sovereign risk weight is 150%.

150%

50%

100%

JCR = ECAI for Regional Banks

(Ref.) History of Credit Rating Industry in Japan

11

Major milestones of Japanese Credit Rating Industry1948 Promulgation of Securities and Exchange Act1949 Formation of Bond Underwriters Committee (BUC)

by major banks and securities firms1979 Establishment of Japan Bond Research Institute (JBRI)1985 Establishment of Japan Credit Rating Agency (JCR)

Establishment of Nippon Investors Service, Inc. (NIS)1987 "Rating" was adopted as one of bond issue

requirementsJapan MOF designated 6 CRAs as qualified CRA

1988 Termination of BUCRelaxation of bond issue requirements (e.g. rating level)

1990 Consolidation of bond issue requirements into "rating"1996 Repeal of bond issue requirements (i.e. rating

requirement)1997 First corporate bond default by Japanese company1998 Merger of JBRI & NIS2006 Japan FSA designates 5 CRAs as ECAI and announced

mapping result2010 Japan FSA introduced CRA Registration System

Registered CRAs in Japan1. Japan Credit Rating Agency, Ltd. (JCR)2. Moody’s Japan K.K.3. Moody’s SF Japan K.K.4. Standard & Poor’s Rating Japan K.K.5. Rating and Investment Information, Inc.6. Fitch Ratings Japan Limited7. Nippon Standard & Poor’s K.K.

(Source) Financial Services Agency, Japanhttp://www.fsa.go.jp/en/regulated/licensed/cra.pdf

Japanese Investors- Benchmark for Japanese

investors

JCR’s Global Strategy

12

Inbound

Foreign Issuers in

Japan

Outbound

Japanese companies in

foreign countries

Japanese Issuers- Over 60% Coverage for

rated Japanese companies

1. Stronghold in Japan 2. Support for Globalization

- Global Regulatory Recognition

- Alliance with EM CRAs

- ACRAA

- Investor Support for Cross-border Investment

Global Regulatory Recognition

13

JAPAN• Registered as Credit Rating Agency by FSA• Recognized as ECAI for Basel II

US• The only Japanese CRA

Registered as Nationally Recognized Statistical Rating Organization (NRSRO) by SEC

EU• The only Japanese CRA certified

under EU Regulation on credit rating agencies

INDONESIA• Accredited as Recognized CRA by Bank

Indonesia for BI regulation for corporate external debt management

HONG KONG• Recognized as ECAI by HKMA

THAILAND• Certified as Approved Credit

Rating Agency by Thai SEC

TURKEY• Recognized as ECAI by BRSA

Tie-up with EM CRAs

14

HQ: Karachi, PakistanOfficial Recognition: Securities and Exchange Commission of Pakistan & State Bank of Pakistan

HQ: Istanbul, TurkeyOfficial Recognition: Capital Market Board, Banking Regulation and Supervisory Agency & Treasury

HQ: Mumbai, IndiaOfficial Recognition: Securities and Exchange Board of India & Reserve Bank of India

HQ: Mexico City, MéxicoOfficial Recognition: Mexico’s National Banking and Securities Commission, US SEC & ESMA

HQ: Kuala Lumpur, MalaysiaOfficial Recognition: Securities Commission of Malaysia & Bank Negara Malaysia

HQ: Lima, PerúOfficial Recognition: Peru SEC (SMV) & Superintendencia de Banca, Securos y AFP

BAHRAIN

Islamic International Rating Agency (IIRA)

BANGLADESH

Credit Rating Agency of Bangladesh Limited (CRAB)Credit Rating Information & Services Limited (CRISL)Emerging Credit Rating Ltd.National Credit Ratings Ltd.

INDIA

Brickwork Ratings India Pvt. Ltd.Credit Analysis and Research Limited (CARE)CRISIL LimitedICRA LimitedSMERA Ratings Limited

INDONESIA

PT Pemeringkat Efek Indonesia (PEFINDO)

JAPAN

Japan Credit Rating Agency, Ltd (JCR)

Rating Agency of Regional Financial Center of Almaty City (RA-RFCA)

KAZAKHSTAN

KOREA

Korea Ratings Corporation (Korea Ratings)NICE Investors Service Co., Ltd. (NICE)

MALAYSIAMalaysian Rating Corporation Berhad (MARC)RAM Rating Services Bhd

PAKISTAN

JCR-VIS Credit Rating Company Limited (JCR-VIS)Pakistan Credit Rating Agency Limited (PACRA)

PEOPLES REPUBLIC OF CHINA

China Cheng Xin International Credit Rating Co., LtdChina Lianhe Credit Rating Co., Ltd.Dagong Global Credit Rating Co., Ltd (Dagong)Golden Credit Rating International Co. Ltd.Shanghai Far East Credit Rating Co., Ltd. (SFECR)Shanghai Brilliance Credit Rating & Investors Service Co., Ltd.

PHILIPPINES

Philippine Rating Services Corporation (PhilRatings)

TAIPEI, CHINA

Taiwan Ratings Corp. (TRC)

THAILAND

TRIS Rating Co., Ltd. (TRIS)

TURKEY

JCR Eurasia Rating

ACRAA – The Broadest Network of CRAs in Asia

15

At the initiative of JCR, the Association of Credit Rating Agencies in Asia (ACRAA) was founded in 2001 for mutual cooperation among CRAs in Asia.

The network has been expanded to 29 CRAs in 14 jurisdictions in Asia.

JCR serves as Chairman.

16

Training

Seminar

Report(Methodology, Industry, Country)

Direct Access to JCR analysts

Private Credit Assessment Report

Proactive Investor Support

Sep 2017JCR Seminar on European Financial Institutions’ TLAC and Capital Instruments

Dec 2017Banco Santander’s inaugural issuance of Samurai SNP Bond with JCR Rating

May 2017JCR’s Rating Assignment on Banco Santander

Jul 2017JCR’s publication of Issuer Report on Banco Santander

Nov 2017JCR’s Assignment of Preliminary Rating on Banco Santander’s Senior Non-Preferred (SNP) Bond

(e.g.) Banco Santander’s SNP Bond

17

Our Product – Credit Rating

18

Long-term Issuer RatingAAA, AA, A, BBB, BB, CCC, CC, C, LD, D

(Both Foreign Currency and Local Currency)

Rating Outlook Positive – Stable – Negative – Developing – Multiple

Long-term Issue RatingAAA, AA, A, BBB, BB, CCC, CC, C, LD, D

Short-term Issuer RatingJ-1, J-2, J-3, NJ, LD, D

Short-term Issue RatingJ-1, J-2, J-3, NJ, LD, D

Preliminary Rating(to be assigned preliminarily for marketing

purpose before terms are finalized.)

Private RatingJCR’s view expressed in the same rating format.

Distributions are limited to those who signed confidential agreement only.

Entities Bonds/Loans

Rating Definition (Long-term Rating)

19

Rating Definition

AAA The highest level of certainty of an obligor to honor its financial obligations

AA A very high level of certainty to honor the financial obligations

A A high level of certainty to honor the financial obligations

BBB An adequate level of certainty to honor the financial obligations. However, this certainty is more likely to diminish in the future than with the higher rating categories.

BB Although the level of certainty to honor the financial obligations is not currently considered problematic, this certainty may not persist in the future.

B A low level of certainty to honor the financial obligations, giving cause for concern

CCC There are factors of uncertainty that the financial obligations will be honored, and there is a possibility of default.

CC A high default risk

C A very high default risk

LD JCR judges that while an obligor does not honor part of the agreed to financial obligations, but it honors all its other agreed to financial obligations.

D JCR judges that all the financial obligations are, in effect, in default.

N.B. “+” or “-” is added between “AA” and “B” to stand for the relative strength within the rating level (e.g., BBB+).

Rating Definition (Short-term Rating)

20

Rating Definition

J-1The highest level of certainty of an obligor to honor its short-term financial obligations.Within this rating category, obligations for which the certainty is particularly high areindicated by the symbol J-1+.

J-2 A high level of certainty to honor the short-term financial obligations, but slightly less thanJ-1

J-3 An adequate level of certainty of an obligor to honor its short-term financial obligations, butsusceptible to adverse changes in circumstances

NJ The certainty of an obligor to honor its short-term financial obligations is less than in theupper-ranking categories.

LD JCR judges that while an obligor does not honor part of the agreed to financial obligations,but it honors all its other agreed to financial obligations.

D JCR judges that all the financial obligations are, in effect, in default.

<Benchmark (for reference only)>J-1+ AAA AA+ AA AA- A+

J-1 A+ A A-

J-2 A- BBB+ BBB BBB-

J-3 BBB- BB+ BB

NJ BB BB- --- C

Rating Scale - Global

21

Mapping ResultJCR Moody's S&P Fitch

Sovereign1-1 AAA ～ AA- Aaa ～ Aa3 AAA ～ AA- AAA ～ AA-1-2 A+ ～ A- A1 ～ A3 A+ ～ A- A+ ～ A-1-3 BBB+ ～ BBB- Baa1 ～ Baa3 BBB+ ～ BBB- BBB+ ～ BBB-1-4 BB+ ～ BB- Ba1 ～ Ba3 BB+ ～ BB- BB+ ～ BB-1-5 B+ ～ B- B1 ～ B3 B+ ～ B- B+ ～ B-1-6 Below B- Below B3 Below B- Below B-

Multilateral Development Banks (MDBs)2-1 AAA ～ AA- Aaa ～ Aa3 AAA ～ AA- AAA ～ AA-2-2 A+ ～ BBB- A1 ～ Baa3 A+ ～ BBB- A+ ～ BBB-2-3 BB+ ～ BB- Ba1 ～ Ba3 BB+ ～ BB- BB+ ～ BB-2-4 B+ ～ B- B1 ～ B3 B+ ～ B- B+ ～ B-2-5 Below B- Below B3 Below B- Below B-

Financial Institutions3-1 AAA ～ AA- Aaa ～ Aa3 AAA ～ AA- AAA ～ AA-3-2 A+ ～ A- A1 ～ A3 A+ ～ A- A+ ～ A-3-3 BBB+ ～ B- Baa1 ～ B3 BBB+ ～ B- BBB+ ～ B-3-4 Below B- Below B3 Below B- Below B-

Corporates4-1 AAA ～ AA- Aaa ～ Aa3 AAA ～ AA- AAA ～ AA-4-2 A+ ～ A- A1 ～ A3 A+ ～ A- A+ ～ A-4-3 BBB+ ～ BBB- Baa1 ～ Baa3 BBB+ ～ BBB- BBB+ ～ BBB-4-4 BB+ ～ BB- Ba1 ～ Ba3 BB+ ～ BB- BB+ ～ BB-4-5 Below BB- Below Ba3 Below BB- Below BB-

(Source) Financial Services Agency of Japan (FSA) (http://www.fsa.go.jp/policy/basel_ii/09.pdf)

N.B. The same mapping result was published by European Securities Markets Authority (ESMA).(http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2016.275.01.0003.01.ENG)

Rating Distribution

22

1/ As of the end of March 20182/ Ratings on Japanese companies (not including sovereign, municipalities, FILP agencies, medical and academic institutions, J-REIT, structured finance, guaranteed bonds).3/ “LD” stands for “Limited Default”; “CM” for “Credit Monitor”.

Rating Policy

23

Rating assignment and verification

Ratings are assigned as per published rigorous rating policy and methodologies, making use of all available information.Validity of ratings is verified by historical performance.

Analysts in charge Analysts are ensured to have sufficient knowledge and expertise.

Analyst Team and Rating Committee

A team is formed by multiple analysts, which makes a proposal to a rating committee. Analysts are ensured to have no conflict of interests to rating applicants.

Information Quality Quality of information is ensured to be sufficient for credibility of ratings.

Prior Screening For new asset securitization products, prior screening is made by a council of senior managers to confirm if it is possible to assign ratings.

Periodical Review of rating policy and methodologies

A council is established to periodically review the rating policy and methodologies.

Ad-hoc Review of rating policy and methodologies

Review is made to the rating policy and methodologies for asset securitization products when the risk characteristics of underlying asset changes materially.

Review and withdrawal of ratings

Ratings are constantly monitored and updated, and regularly reviewed.Should ratings be withdrawn, public announcement is made unless the rated entity or financial obligation cease to exist.

Rating Process

24

11. Publication

10. Rating Notification and Appeal Process

9. Rating Committee

8. Further Assessment

7. On-site Meeting Interview (and Site Visit if necessary)

6. Initial Assessment

5. Verification of Information Quality

4. Information Request

3. Prior Screening

2. Assignment of Rating Analysts

1. Request for Rating

Normally 2 months

12. Annual Review (Interview + Rating Committee)

If gross factual misunderstanding were identified, JCR would re-examine the rating by replacing analysts and reorganizing rating committee.

“Without delay”(FSA Ordinance)“Within 4 Business

Days” (JCR rule)

Rating Methodology

25

Corporate Construction, Food, Paper & Pulp, Chemical, Pharmaceutical, Petroleum, Tire, Glass, Cement, Iron & Steel, Non-ferrous Metal, Electronics, Machinery, Automobile & Auto-parts, Trading, Retail, Food Service, Real Estate, Railway, Land transport, Marine transport, Air transport, Warehouse, Information service, Telecom, Power, Gas

Financial Institutions Bank, Securities, Life Insurance, General insurance, Lease, Consumer finance, Credit sales and credit card, Capital and TLAC instruments

Public Sector Local Government, Fiscal Investment and Loan Program (FILP) Agency

Sovereign & Supranational Sovereign, Public Sector Entities, Multilateral Development Banks (MDB)

Medical institutions

Educational Institutions

Structured Finance ABS, RMBS, CDO, CMBS, Future Flow Securitization, Credit-Linked Products, WBS,Repackaged Financial Instruments, ABCP, Project Finance, Ship Finance, Aviation Finance, EETC, J-REIT, Listed Infrastructure Funds, Swap Counterparty, Deposit accounts and investment instruments, Commingling Risk, Backup Servicer

Others Holding company, Subsidiary, Hybrid Securities’ Equity Content, Financial Institutions’ TLAC and Capital instruments

N.B. All the methodologies are publicly available at JCR website: (https://www.jcr.co.jp/en/rrinfo/).

(e.g.) Sovereign & Country Ceiling

26

Rating

AAA

X+3

X+2

X+1

X

C

Sovereign Ceiling = Sovereign Rating

Country Ceiling(normally

Sov Rating+ 0-3 notch)

- Supra-national entities- Strong support from foreign parents

Entities with (a) stable and solid earnings base in foreign countries, (b) strong ability to raise funds in the international

capital markets, and (c) sound financial structure

Vast majority

Details are available at:<https://www.jcr.co.jp/en/pdf/dm25/JCR's_Rating_Methodology20141107.pdf>

(e.g.) Financial Institutions’ Capital and TLAC Instruments

27 Details are available at:<https://www.jcr.co.jp/en/pdf/dm26/Reference_Reports/20170427Financial_Institutions_Capital_and_TLAC_Instruments.pdf>

Notch-down approach ((A) + (B))

(B) (Shorter) Distance to Loss(A) Recoverability

Subordinated (e.g., Holding Company,

SNP, T2&T1)

-1 notch

TriggerLevel

Trigger event Notching

Very Low Point of non-viability (PON), Resolution 0Low Common Equity Tier 1 Ratio < 5.125% -1

Issuer’s discretion -1Issuer’s discretion but likely constrained bysystem or authorities' intention

-2

Common Equity Tier 1 Ratio < 7.0% -3

High

(cf.) Notch-down for Holding Companies’ TLAC instruments in jurisdictions other than Japan

= “Structural Subordination (-1)” + “Very low trigger (0)” + “Country specific bail-in possibility prior to PON/Resolution, if any (0 or -1)”

JapanSeniority Trigger

Senior debt (=Issuer Rating) Default -1 AA-Sub debt Default -1 AA- -2Tier 2 (>5y, not perpetual) PON -1 -2 A+Tier 2 (perpetual) 1/ -2 -3Additional Tier 1 (AT1) 2/ -3 -4 A-

1/ Shortage in distributable funds (discretion)2/ Shortage in distributable funds (mandatory), CET1<5.125%

(mandatory), PON (mandatory) or issuer's discretion

AA

IssuerBank Holding

EUSeniority TriggerSenior debt (=Issuer Rating) ResolutionSenior Non-Preferred Debt Resolution -1 AA-Tier 2 (>5y, not perpetual) 3/ -2 A+Additional Tier 1 (AT1) 3/, 4/ -4 A-

3/ State Aid (Bail-in), PON, Resolution4/ Issuer's discretion for optional suspension of dividend

or interest payment, etc.

IssuerAA

28

Rating Industry Landscape

29

JCR Ratings are solicited by over 600 Japanese Companies, 62% of the total.

Industry-wise Coverage (Japan)

30

No. 2/ JCR Coverage 3/ No. 2/ JCR Coverage 3/

Fishery, Agriculture and Forestry 2 100% Precision Instrument 11 36%

Mining 2 50% Other Product 15 47%

Construction 27 63% Electric Power and Gas 20 60%

Food 38 71% Land Transport 34 74%

Textile and Apparel 7 71% Marine Transport 4 100%

Pulp and Paper 10 60% Air Transport 2 100%

Chemical 57 49% Warehousing and Harbor Transport Service 12 67%

Pharmaceutical 18 11% Information and Communication 25 60%

Oil and Coal Product 7 86% Wholesale Trade 47 70%

Rubber Product 6 83% Retail Trade 39 77%

Glass and Ceramic Product 13 62% Banks 156 76%

Iron and Steel 13 85% Securities and Commodities Futures 28 75%

Non-ferrous Metal 14 64% Insurance 39 56%

Metal Product 8 75% Other Financing Business 62 81%

Machinery 45 56% Real Estate 24 71%

Electric Appliance 53 38% Services 29 59%

Transport Equipment 37 43%1/ As of the end of Mar 20182/ Number of Japanese companies that solicit credit ratings3/ Not including unsolicited ratings

Coverage – Japanese Banks

31

JCR has the highest rating coverage for Japanese Banks.

Coverage – Banks’ Capital Instruments

32

The only CRA that rates Japanese megabanks’ all B3AT1 instruments.

(Source) Bloomberg

Coverage – Hybrid Securities

33

Market leader for Hybrid Securities’ ratings in Japan.

Judgment of Equity Calculation

Equivalent to Stock 100%

High 75%

Medium 50%

Low 25%

Equivalent to Debt 0%

Key Criteria Consideration

Permanence of Principal

Any legal redemption obligation? Call provision? Reinforcing factors?

Flexibility of Interest Payment

Any flexibility to suspend interest/dividend payment?

Cumulative?

Subordination The lowest claim ranking upon bankruptcy?

2017 MS&AD Insurance Group Holdings Subordinated BondDon Quijote Subordinated LoanHitachi Zosen Subordinated LoanToyo Tire & Rubber Subordinated LoanYokohama Reito Subordinated LoanSompo Japan Nipponkowa Insurance Subordinated BondsSekisui House Subordinated BondsKonica Minolta Subordinated LoanSoftBank Subordinated LoanTaiyo Life Insurance Subordinated Bonds

2018 Hulic Subordinated BondsHulic Subordinated LoanNomura Real Estate Holdings Subordinated BondsConcordia Financial Group, Ltd. Subordinated BondsJFE Holdings, Inc. Subordinated BondsNomura Real Estate Holdings Subordinated BondsToyobo Subordinated LoanSuntory Holdings Subordinated Bonds

Coverage – Structured Finance

34

JCR rates a wide range of structured finance products in Japan,which totals over 1,000 financial products annually.

Coverage – Project Finance

35

Spearheads the ratings on PPP and securitization in Japan –contributing to market evolution of financial products.

Haneda Airport International Terminal

Civil Servants Housing

PASMO – subway IC card Mega Solar Bio-mass

Ship Investment Fund

Coverage – J-REIT

36

Market leader for J-REIT rating.

Coverage – Sovereign & MDB

37

Multilateral Development Banks JCR A (JP)African Development Bank (AfDB) AAA -Asian Development Bank (ADB) AAA AAACentral American Bank for Economic Integration (CABEI) AA- -Corporación Andina de Fomento (CAF) AA -European Bank for Reconstruction and Development (EBRD) AAAp -Inter-American Development Bank (IDB) AAA -International Bank for Reconstruction and Development (IBRD) AAA -

Asia Pacific EMEA Americas

AAA Australia, Japan, Singapore Belgium, Denmark, Finland, France,Germany, Netherland, Norway, UK

Canada, US

AA+ Hong Kong SARAA SpainAA- KoreaA+ Czech, Italy, Slovak, SloveniaA Malaysia Poland, PortugalA- Thailand México, PerúBBB+ India, Philippines HungaryBBB Indonesia RomaniaBBB- Turkey BrazilBB+ RussiaBBBB-

Coverage – Foreign Issuers

38

39

Non-JP Issuer Rating (Solicited only)Issuer Industry RatingMDB Finland

African Development Bank MDB AAA Pohjolan Voima Oy Energy A+Asian Development Bank MDB AAA Teollisuuden Voima Oyj Energy A+Central American Bank for Economic Integration MDB AA- France Corporación Andina de Fomento (CAF) MDB AA Electricite de France S.A. Energy AAInter-American Development Bank MDB AAA Orange Telecom A-World Bank (IBRD) MDB AAA Renault Automobile A-

India HungaryExport-Import Bank of India Bank BBB+ Hungary Sovereign BBB+ICICI Bank Limited Bank BBB+ National Bank of Hungary Sovereign BBB+Indian Railway Finance Corporation Limited Finance BBB+ Poland

Indonesia Republic of Poland Sovereign ARepublic of Indonesia Sovereign BBB SpainAdaro Energy Energy BBB- Banco Santander S.A. Bank A+

Korea TurkeyBusan Bank Bank A Republic of Turkey Sovereign BBB-Hanwha Chemical Corporation Chemical A- Unted KingdomHotel Lotte Services A Avation Finance BBHyundai Capital Services, Inc. Finance A+ CanadaKorea Electric Power Corporation Energy AA- Export Development Canada Finance AAALotte Card Finance A Quebec (The Province of) Municipality AA+Lotte Shopping Services A United StatesPOSCO Steel AA- KKR & Co. L.P. Finance A+Shinhan Bank Bank A+ Mexico

Malaysia America Movil, S.A.B. de C.V. Telecom AMalayan Banking Berhad Bank A United Mexican States Sovereign A-

EM Samurai Issues

40

To Cultivate & WidenInvestor Base with JCR Rating

1. Quality of Analysis- Registered CRA in Japan- In-depth information based on its

global network

2. Bilingual Services (JP&EN)- Japanese Report- Japanese Analyst

3. Additional Value- Bond Index (Nomura BPI)- Investment guidelines- ECAI for 85% of Japanese Regional

Banks

41

Non-Japanese BanksShadow [3 Banks]

Shadow [2 Banks]

Deutsche Bank (A+p)

Shadow [3 Banks]

Shadow [2 Banks]

Banco Santander (A+)

Busan Bank (A)Shinhan Bank (A+)

May Bank (A)

Exim India (BBB+)ICICI Bank (BBB+)

Export Development Canada (AAA)

Shadow [4 Banks]

Shadow [1 Bank]

Shadow [1 Bank]

N.B. “Shadow” = Internal Rating used for structured products (e.g., credit linked note, repackaged note)

JCR Bond Rating (as of 30 Apr 2018)

42

Country Issuer Date JCR Rating Maturity Amount(JPY bil)

CouponRate (%)

France Electricité de France Jan 2017 AA

10 year12 year15 year20 year

107.919.66.43.1

1.088%1.278%1.569%1.870%

France Renault Jun 2017 A- 3 year5 year

63.426.6

0.360%0.500%

Korea Shinhan bank Nov 2017 A+1.5 year3 year5 year

1.316.78.3

0.180%0.360%0.520%

Spain Banco Santander(Senior Non-Preferred) Dec 2017 A 5 year

10 year83.712.2

0.568%1.015%

Turkey Sovereign Dec 2017 BBB- 3 year 60.0 1.810%

China China Eastern Airlines(Guaranteed) Mar 2018 AA 3 year 10.0 0.330%

Hungary Sovereign Mar 2018 BBB+ 3 year 30.0 0.370%

US KKR Mar 2018 A+5 year7 year

20 year

25.05.0

10.3

0.509%0.764%1.595%

Mexico Sovereign Apr 2018 A-

5 year7 year

10 year20 year

57.224.138.715.0

0.600%0.850%1.050%2.000%

43

Growing Demand for ESG Investment in Japan

44

Wider Investor Base (JRTT Green Bonds in Nov 2017)Investors for Green Bonds by Japan Railway Construction, Transport and Technology Agency (JRTT) (assessed by JCR) - Banks, Life Insurance, Investment Fund, Credit Union- University (Kansai, Kogakuin, Rissho)- Health Insurance (Sumitomo life, Kanihoken Kanyusha Kyokai)- Others

- Environmental Restoration and Conservation Agency- Osaka Prefecture Town Management Foundation- Promotion and Mutual Aid Corporation for Private Schools- Sakata Seed Corporation- UCR Infrastructure and Transport

http://www.jrtt.go.jp/05ir/ir-saikenResult.html

Intermediaries’ View – Nomura Securities DCM

(Mar 2017) “Obstacles for issuers to enter the green bond market remain high in terms of cost and complexity of bringing a deal to the market – specifically the need for third party verification of the borrower’s green claims.”

“It’s not just the extra work to justify the green credentials of the bond but a language barrier exists, in that most of the second opinion providers are not Japanese.” http://www.globalcapital.com/article/b12bhj651t6dc4/locals-in-focus-with-japanese-green-bonds-all-set-to-blossom

JCR’s Green Bond Evaluation

45

Phase 1: Evaluation on Greenness(1) To confirm if the project is qualified as green

• Does it have positive environmental impact?• Based on ICMA GB Principles & MOE’s GB Guidelines

(2) To assess how much of the proceeds are used for the qualified green project

Green Portion Grade

100-90% g1

90%> g2

70%> g3

50%> g4

30%> g5

10%> Not eligible

Phase 2: Evaluation on MOTTo evaluate the Management, Operation and Transparency on the green projects

Score Grade

100-80 m1

79-60 m2

59-40 m3

39-20 m4

>20 m5

Phase 3: JCR’s Green Bond Evaluation

To be determined by Evaluation Committee.

m1 m2 m3 m4 m5

g1 Green 1 Green 2 Green 3 Green 4 Green 5

g2 Green 2 Green 2 Green 3 Green 4 Green 5

g3 Green 3 Green 3 Green 4 Green 5 -

g4 Green 4 Green 4 Green 5 - -

g5 Green 5 Green 5 - - -

Perspective Weight

1. Standard and Process to Select Green Project 25%

2. Management of Proceeds 25%

3. Reporting 25%

4. Organization’s Efforts 25%

Details are available at: <https://www.jcr.co.jp/download/d56f355f15ffdbc5de085b95feff5f151f9f45d5f81fa5cffb/20171102GB(EN).pdf>

JCR’s Track Record

46

Nov 2017Canadian Solar Infrastructure Fund, Inc. – Green Loan- Proceeds are used to acquire renewable energy generation assets and other related costs- JCR assigned “Green 1” (See next page for details)

Nov 2017Japan Railway Construction, Transport and Technology Agency – Green Bond- Proceeds are used for investment in urban railway construction- JCR verified that the bond is in line with the Green Bond Guidelines by Japan’s Ministry of

Environment

May 2018NYK Line – Green Bond- Proceeds are used to finance and refinance Eligible Projects, namely LNG fuelled vessels,

LNG Bunkering Vessels, Ballast Water Management System and SOx scrubber system.- JCR verified that the bond is in line with the Green Bond Guidelines by Japan’s Ministry of

Environment

47

Canadian Solar Infrastructure Fund, Inc.

Case Study

1. Evaluation on Greenness = “g1”

• 100% of the proceeds are invested in solar projects (= green projects)

2. Evaluation on Management, Operationand Transparency = “m1”

• Environment assessment incl. CO2 reduction and potential soil contamination is duly taken for each project

• Use of proceeds is limited to the targeted power facilities, and traceable through specific bank accounts.

• Disclosure is made through “Securities Registration Statement”, which will be updated bi-annually.

• The parent company, Canadian Solar Inc., has widely contributing to the environmental issues. Their management is explicitly committed. Multiple external verifications are made for acquired assets.

• Long-term Loan (10 years from Oct 2017, JPY15.7 billion)• Proceeds are used to acquire renewable energy generation assets

and other related costs

“Green 1”

(Source) https://www.jcr.co.jp/download/ded8ed0e0839d0b1b9e797ffd7de085ab75da5e9994a1a0aa9/17d0667e.pdf

JCR’s Social Bond Evaluation

48

Phase 1: Evaluation on Social Impact(1) To confirm if the project is qualified as social

• Does it have positive social impact?• Based on ICMA Social Bond Principles

(2) To assess how much of the proceeds are used for the qualified social project

Green Portion Grade

100-90% s1

90%> s2

70%> s3

50%> s4

30%> s5

10%> Not eligible

Phase 2: Evaluation on MOTTo evaluate the Management, Operation and Transparency on the social projects

Score Grade

100-80 m1

79-60 m2

59-40 m3

39-20 m4

>20 m5

Phase 3: JCR’s Social Bond Evaluation

To be determined by Evaluation Committee.

m1 m2 m3 m4 m5

s1 Social 1 Social 2 Social 3 Social 4 Social 5

s2 Social 2 Social 2 Social 3 Social 4 Social 5

s3 Social 3 Social 3 Social 4 Social 5 -

s4 Social 4 Social 4 Social 5 - -

s5 Social 5 Social 5 - - -

Perspective Weight

1. Standard and Process to Select Social Project 25%

2. Management of Proceeds 25%

3. Reporting 25%

4. Organization’s Efforts 25%

Details are available at: <https://www.jcr.co.jp/download/7555252e52e07f955d77e30a77def2fd927f75c75c259287e7/SB%20evaluation%20EN.pdf>

49

Flow of Funds

50

Flow of Funds in Japan (Stock, End of 2017, JPY tri)

Household Saving

51

Wealth of Japanese household keeps growing.

(Source) Bank of Japan "Flow of Funds Statistics" (End of Dec 2017)

Net Worth

(USD 13 tril)JPY 1,560 tri

Financial Asset

JPY 1,880 tri(USD 15 tri)

Financial LiabilityJPY 320 tri(USD 3 tri)

51%

18%

28%

3% BankDeposit

Securities

Pension &Insurance

Others

52

Bond MarketJapan has the 2nd largest bond market, but dominated by JGB.

53

Corporate Bond Market

No. of Corporate Bond Issuers : 423 (Sep 2017)

(cf) No. of Listed Companies: 3,607 (Mar 2018)

JPY Corporate Bond

54

Samurai (Public Offering)Tokyo Pro-Bond (Private)

Euro MTN (Private)

1. Bond Index Eligible (JCR “A-” or above)

2. Investor Base Wide

3. Issue Amount Larger

4. Documentation Japanese

5. GAAP FSA-approved GAAP *

6. Disclosure Semi-annual Update

7. Preparation Time Long

1 Not Eligible2 Medium3 Medium4 Japanese or English5 FSA-approved GAAP *6 Annual Update7 Medium

1 Not Eligible2 Medium3 Smaller4 English5 N.A.6 Annual Update7 FastGAAP approved by FSA: Australian, Belgium (EU-IFRS), Canadian, Dutch, Finnish, French, German,

Hong Kong (HK-FRS), IFRS, Irish, Korean (K-IFRS), Luxembourg, Malaysia (M-IFRS), Mexican, Norwegian, Singapore (S-IFRS), Spanish, Swedish, Swiss, Taiwan (Taiwan-IFRS), UK and US

+ Rating Requirement

(JCR, Moody’s, S&P, etc.)

Demand for Borrowing & Interest Rate

55

Bank-dominant financial sector + Subdued demand for borrowing

Banking Sector

56

Excess liquidity is depriving banks’ profitability.

Asset Management Industry

57 (Source) The Life Insurance Association of Japan

Asset management became challenging.

Cross Border Loan & Investment

58

Cross-border loan/investment became popular.

(Source) BOJ Financial System Report (Apr 2017)

Nationwide Banks

Regional Banks Credit UnionJPY tri

JPY

FX

Japanese Foreign Securities Investors

59

Japan is now the 2nd largest foreign portfolio investor.

EM Local Currency Bond Investment

60 (Source) The Investment Trusts Association of Japan

Household investors even take EM currency risk.

Cross Border Investors

61

But the lion’s share goes to institutional investors.

62

Cautious Investment StanceInstitutional investors are conservative.

(Source) Bank of Japan

(Source) Japan Securities Dealers Association

Value of JCR Rating

63

JCR Rating Cultivate & Diversity Investor BaseJCR rating is a key to open the door.

Sep 2017JCR Seminar on European Financial Institutions’ TLAC and Capital Instruments

Dec 2017Banco Santander’s inaugural issuance of Samurai SNP Bond with JCR Rating

May 2017JCR’s Rating Assignment on Banco Santander

Jul 2017JCR’s publication of Issuer Report on Banco Santander

Nov 2017JCR’s Assignment of Preliminary Rating on Banco Santander’s Senior Non-Preferred (SNP) Bond

(e.g.) Banco Santander’s SNP Bond

64

For further queries or informationhttps://www.jcr.co.jp/en/

Rating Request & Rating Information

Relationship Management DepartmentHaruhiko Shiono+81 3 3544 7012 / [email protected]

Rating Methodology International DepartmentAtsushi Masuda+81 3 3544 7448 / [email protected]

Project & Asset Finance DepartmentFumihiro Honda +81 3 3544 7018 / [email protected]

Green Bond, Social Bond &ESG Evaluation

Green Bond/ESG Evaluation DepartmentAtsuko Kajiwara+81 3 3544 7025 / [email protected]

General enquiries Special Advisor to the PresidentSatoshi Nakagawa +81 3 3544 7011 / [email protected]

The information in this material has been compiled by Japan Credit Rating Agency, Ltd. (JCR) based on the information publicly available and deemed reliable as of the date shown in the front page. No representation or warranty, expressed or implied, is made by JCR as to the accuracy or completeness of the information contained herein.