Rating Action: Moody's assigns provisional rating to Aeon Bank RMBS Series 2 backed by residential mortgagesGlobal Credit Research - 20 Apr 2021JPY20 billion in Debt Securities affectedTokyo, April 20, 2021 -- Moody's SF Japan K.K. has assigned a provisional rating to the following transaction.The complete rating action is as follows:Transaction Name: Aeon Bank RMBS Series 2Class, Issue Amount, Scheduled Dividend Rate, RatingSeries 2 Beneficial Interests, JPY20 billion, Floating, (P)A2 (sf)Closing Date: June 15, 2021Final Maturity Date: February 28, 2059Underlying Asset: Residential mortgage loansOriginator/Seller/Servicer: AEON Bank, Ltd.Asset Trustee: Mitsubishi UFJ Trust and Banking CorporationArranger: Mitsubishi UFJ Trust and Banking CorporationCredit Enhancement: The senior/subordinated structure and excess spread available.Subordination at the master trust level: Approx. 14.3%RATINGS RATIONALEThe Seller entrusts an additional pool of its residential mortgage loans, all related rights and cash to the Asset Trustee, based on the master trust agreement between both parties. In turn, the Seller receives the Seller's Beneficial Interests. At the same time, the principal of the Reserve Beneficial Interests is increased. The Seller's Beneficial Interests are divided into the Series 2 Beneficial Interests and the Subordinated Beneficial Interests. The latter is combined with the existing Subordinated Beneficial Interests.Entrustment of the residential mortgage loans is perfected against third parties via registration pursuant to the Perfection Law. Perfection against obligors of the receivables is not made unless certain events occur.The Seller has established first security interests (mortgages) on the collateral properties. The Asset Trustee holds the security interests in accordance with the entrustment of the loans. Transfer of the ownership of the security interests is not perfected by registration unless certain events occur.The Reserve Beneficial Interests are backed by a cash reserve that will cover liquidity risk, commingling risk, set-off risk, registration expenses for the transfer of the ownership of the security interest and fees relating to the start of back-up servicer operations and so forth.The Seller retains the Reserve Beneficial Interests and the Subordinated Beneficial Interests, and sells the Series 2 Beneficial Interests to investors. The transfer of the Series 2 Beneficial Interests is perfected against relevant obligors and third parties under Article 94 of Japan's Trust Law.The Seller acts as the initial servicer, under the Servicing Agreement with the Asset Trustee.The transaction does not have a third-party Back-up Servicer in place that could take over servicing operations. However, the Asset Trustee is responsible for appointing an eligible Back-up Servicer by entering into a new servicing agreement if any servicer replacement preparation events occur.Special Servicer is appointed, under the Special Servicing Agreement with the Asset Trustee and the initial servicer. The Asset Trustee is responsible for appointing an eligible Back-up Special Servicer by entering into a back-up special servicing agreement if any special servicer replacement preparation events occur.The underlying assets of the master trust are shared by the Series 2 Beneficial Interests and previously issued Series Beneficial Interests under the master trust (collectively, "Series Beneficial Interests").Principal collection from the underlying assets is allocated according to the original issuance amount of each Series Beneficial Interests. The Series Beneficial Interests are redeemed on a monthly pass-through basis.The redemption of the Subordinated Beneficial Interests is suspended until the full payment of all the Series Beneficial Interests and Reserve Beneficial Interests (sequential payment mechanism).If any accelerated amortization events occur, the dividends waterfall to the Reserve Beneficial Interests and the Subordinated Beneficial Interests are suspended, and the excess spread is used to redeem all the Series Beneficial Interests. Key accelerated amortization events include a servicer replacement event occurring.The rating is based mainly on the credit quality of the receivables, the transaction structure, and the servicer's experience.The interest rate type of underlying assets is floating rate with the option to convert to fixed rate. Interest rate on a portion of the loan portfolio are fixed at closing and thus the transaction has an asset-liability interest rate mismatches. The rated notes are exposed to the risk that the base interest rate increases significantly which could lead to negative carry. Moody's has considered such negative carry risk in the cash flow analysis.Having analyzed both the attributes of residential mortgages in the master trust and the originator's residential mortgage loan pool historical performance, Moody's estimated an expected cumulative gross loss rate of 3.1%. Moody's also determined a portfolio Expected Loss (EL) of 1.6% and a MILAN Credit Enhancement (Milan CE) of 9.7%. In addition, Moody's used the portfolio EL and the MILAN CE to determine a probability loss distribution and conducted a cash flow analysis with multiple portfolio loss scenarios of the distribution.Moody's assumes that, given the structure of the transaction as well as other factors, the risk of interruption to the cash flow from the assets in the event of the seller's or the Asset Trustee's bankruptcy is sufficiently minimized to achieve the rating assigned.Moody's considers the seller sufficiently capable of servicing the pool, having taken into account the seller's business experience and the servicing operations.The principal methodology used in this rating was "Moody's Approach to Rating RMBS Using the MILAN Framework" (Japanese) published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1248144. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Factors that would lead to an upgrade or downgrade of the rating:The primary factor that could lead to an upgrade of the rating is better performance of the underlying assets than Moody's expected. The primary factor that could lead to a downgrade of the rating is worse performance of the underlying assets than Moody's expected.Moody's has also conducted the sensitivity analysis below which provides the number of notches by which the model-indicated output of the deal would have varied if different assumptions had been made as to certain key model parameters. The analysis assumes that the deal has not aged.If the expected cumulative gross loss rate and the MILAN CE were changed from 3.1%/9.7% to 3.7%/11.6% and 4.7%/14.6% and other assumptions remained unchanged, the model-indicated output of the transaction would change by 1 and 2 notches respectively.The analysis results are model-indicated outputs, which are one of the many quantitative and qualitative factors considered by rating committees in determining actual ratings. This analysis does not intend to measure how the rating of the deal might migrate over time, but rather, how the initial model-indicated output of the deal might have differed if certain key model parameters had been varied.The coronavirus pandemic has had a significant impact on economic activity. Although global economies have shown a remarkable degree of resilience to date and are returning to growth, the uneven effects on individual businesses, sectors and regions will continue throughout 2021 and will endure as a challenge to the world's economies well beyond the end of the year. While persistent virus fears remain the main risk for a recovery in demand, the economy will recover faster if vaccines and further fiscal and monetary policy responses bring forward a normalization of activity. As a result, there is a heightened degree of uncertainty around our forecasts. Our analysis has considered the effect on the performance of consumer assets from a gradual and unbalanced recovery in Japanese economic activity.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Moody's SF Japan K.K. is a registered credit rating agency under the Financial Instrument and Exchange Act but not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore the credit ratings assigned by Moody's SF Japan K.K. are Registered Credit Ratings to the FSA, but are not NRSRO Credit Ratings.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Shinichiro Kan VP - Senior Credit Officer Structured Finance Group Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 Yusuke Seki Associate Managing Director Structured Finance Group JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 Releasing Office: Moody's SF Japan K.K. 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