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Rating Action: Moody's upgrades rating on Class D Notes from DTC One apartment loan securitizationGlobal Credit Research - 27 Jan 2022Tokyo, January 27, 2022 -- Moody's Japan K.K. has upgraded the rating on the Class D Notes issued by DTC One Special Purpose Company.The affected rating is as follows:DTC One Special Purpose Company....JPY320M Class D Notes, Upgraded to Aaa (sf); previously on February 24, 2021, Upgraded to Aa1(sf)RATINGS RATIONALEThe upgrade of the Class D Notes reflects the increased credit enhancement from the redemption of the notes in a sequential manner that starts with the most senior class, followed by the junior classes.In addition to the scheduled principal redemptions from the loan pool, prepayments have contributed to increased credit enhancement for Class D Notes.The loans have exhibited good performance, with only one defaulted loan so far, and there were no delinquent loans based on the pool as of the end of November 2021. The defaulted loan has been resolved with recovery rates exceeding Moody's expectations.Rent levels per room have been on a slightly declining trend, and vacancy rates have recently increased for some properties, although overall vacancy rate of the pool stayed at a moderate level. Cash flows for most of the properties have been ample to cover loan repayments to date.Moody's expects that cash flows from the properties will deteriorate as the properties age, because they are located in regions with weak demand. The properties are located across Japan, including in rural areas. Moody's has conducted a property-by-property analysis to derive its assumptions on the pool performance.Moody's expects that rents will continue to trend downwards and vacancy rates will increase from their current levels, leading to deteriorating cash flows and potential defaults. Moody's also stresses the recovery rates, given the location of some properties in rural areas.In addition, the number of loans in the pool has decreased significantly since closing following full prepayments, mainly due to refinancing to other lenders.The resultant lower diversification with chunky exposures makes Class E Notes, the most junior rated class, more sensitive to the default of a large loan in the pool.Moody's has also taken into account the negative carry risk, which has materialized for the deal. The risk will increase as the burden of fixed costs increases while the loan pool continues to amortize. Negative carry results in principal collections being used to pay note interest, hence reducing the credit enhancement of the rated notes. The negative carry amount will be absorbed by the then-most junior class in the capital structure.Moody's has conducted cash flow analyses under various sensitivity scenarios, including considering higher correlation between loan defaults. Moody's has also captured the significant asset concentrations present in the simulated portfolio default distribution.Since closing, the floating interest rate due on the underlying loans and the notes had been referring to the six-month Japanese yen Libor, which was discontinued on 31 December 2021. At this point in time, the transaction parties have not changed the reference interest rate by contract amendment.The notes side, which is governed by, and construed in accordance with English law, is expected to refer to the synthetic yen Libor (which is calculated as TORF + adjustment spread), as per the Critical Benchmarks Bill framework. For the underlying loan side, the applicable interest rate will refer to the TORF + adjustment spread, following the notification sent out by the lender. Thus, there should be no interest rate mismatch risk in the coming months.However, given that the synthetic yen Libor is planned to cease at the end of 2022, there is a likelihood of interest rate mismatch risk after 2022, when the notes coupon may refer to a floating rate quoted by reference banks or be fixed at the last applied rate. Moody's has also taken this risk into account.The rating action reflects the positive effects from increased credit enhancement after taking into account the abovementioned risks and Moody's expectation for loan performance.The principal methodology used in this rating was "Moody's Global Approach to Rating SME Balance Sheet Securitizations (Japanese)" published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1264374. 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:Factors that could lead to a downgrade include a deterioration in the credit quality of the collateral pool, a further lack of diversification in the collateral pool, and a decrease in the credit enhancement available for each class of notes.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 includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each 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 ratings 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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.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. Chiharu Nagayoshi Analyst Structured Finance Group Moody's Japan K.K. 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