Summary of Rating Methodologies for Structured Finance Products Rating and Investment Information, Inc. Apr 1, 2020 Table of Contents Chapter 1: General .................................................................................................................. 5 Subchapter 1: Positioning of Rating Methodologies and approach to structured finance products . 5 Subchapter 2: Basic of credit rating method for SF products ..................................................... 7 Subchapter 3: Monitoring method of credit ratings ................................................................ 11 Chapter 2: Particulars: Risks regarding structure ....................................................................... 15 Subchapter 1: Structure of asset transfer ............................................................................... 15 Subchapter 2: Structure of asset holding (SPV) ..................................................................... 18 Subchapter 3: Structure of asset administration ..................................................................... 25 Subchapter 4: Structure of external credit enhancement ......................................................... 39 Subchapter 5: Structure of external liquidity enhancement ..................................................... 42 Subchapter 6: Structure of cash flow distribution .................................................................. 44 Chapter 3: Particulars: Risks regarding underlying assets .......................................................... 46 Subchapter 1: Installment receivables .................................................................................. 46 Subchapter 2: Lease receivables (finance lease) .................................................................... 53 Subchapter 3: Residential loan receivables ........................................................................... 58 Subchapter 4: Japan Housing Finance Agency MBS .............................................................. 67 Subchapter 5: Consumer loan receivables ............................................................................. 72 Subchapter 6: Corporate loan receivables ............................................................................. 78 Subchapter 7: Promissory note receivables ........................................................................... 82 Subchapter 8: Accounts receivable....................................................................................... 84 Subchapter 9: Bonds .......................................................................................................... 88 Subchapter 10: Derivative transactions (credit default swap, etc.) ........................................... 93 Subchapter 11: Other monetary receivables (including trust beneficial interest) ........................ 99 Subchapter 12: Real estate (real estate-backed trust beneficial interest) ................................. 101 Subchapter 13: Real estate non-recourse loans .................................................................... 104 Subchapter 14: Development-type real estate ...................................................................... 106 Subchapter 15: Security deposit receivables ........................................................................ 109 Subchapter 16: Guaranteed receivables .............................................................................. 112 Subchapter 17: Medical fee receivables/Dispensing fee receivables ...................................... 116 Subchapter 18: Monthly clear (credit card) receivables ........................................................ 118 Subchapter 19: Projects (including PFI) ............................................................................. 122 Subchapter 20: Business cash flow, etc. .............................................................................. 137 Subchapter 21: Sub-performing loans, etc. ......................................................................... 138 2/184 ©Rating and Investment Information, Inc. Subchapter 22: Monetary receivables from airline companies and aircraft ............................. 140 Subchapter 23: Other Assets (excluding those specified in the other subchapters) ................... 144 Chapter 4: Particulars: Cash flow risk .................................................................................... 147 Subchapter 1: Analysis method for monetary receivables, etc. (Large pool approach) ............. 147 Subchapter 2: Analysis method for monetary receivables, etc. (Small pool approach) ............. 155 Subchapter 3: Analysis method for real estate securitization ................................................. 157 Subchapter 4: Analysis method for project finance .............................................................. 165 Subchapter 5: Analysis method for business cash flow, etc. .................................................. 169 Subchapter 6: Analysis method using cash flow test ............................................................ 171 Subchapter 7: Analysis method based on credit ratings of underlying assets and parties involved in the structure .................................................................................................................... 173 Subchapter 8: Analysis method for measures to reduce counterparty risk of derivative products ...................................................................................................................................... 175 Subchapter 9: Deleted ...................................................................................................... 177 Subchapter 10: Analysis method of risk transfer transactions ................................................ 178 Subchapter 11: Analysis method for aircraft finance ............................................................ 179 Chapter 5: Particular: Monitoring .......................................................................................... 181 Subchapter 1: Monitoring of credit ratings of underlying assets and parties involved in the structure.......................................................................................................................... 181 Subchapter 2: Monitoring for the large pool approach .......................................................... 181 Subchapter 3: Monitoring for the small pool approach ......................................................... 182 Subchapter 4: Monitoring of rated products backed by real estate ......................................... 182 Subchapter 5: Monitoring of short-term products backed by promissory note receivables, accounts receivable, etc. ................................................................................................................ 182 Subchapter 6: Monitoring of rated products backed by project and business cash flow, etc. ..... 183 Subchapter 7: Monitoring of rated products backed by monetary receivables from airline companies and aircraft ..................................................................................................... 183 Subchapter 8: Monitoring of credit ratings for programs ...................................................... 183 3/184 ©Rating and Investment Information, Inc. (Notes) “Basic issues” in Chapters 2 and 3 present facts. “Risk factors” in Chapters 2 and 3 describe major risk factors. “Response to risk” in Chapters 2 and 3 means responses to risk by originators, arrangers, etc. If there are multiple responses to one risk factor, any one response may be used either alone or in combination with another response. “Perspective for evaluation” in Chapters 2 and 3 means R&I’s perspective for evaluating “Response to risk.” If any response other than “Response to risk” described is performed, R&I will perform an evaluation as to whether or not such a response is appropriate. The “entities acceptable to R&I” described in this Summary are those corporations to which R&I assigns undisclosed credit ratings and whose appropriateness R&I acknowledges in such a context. “Structured finance products (SF Products)” mean securitized products, derivative products, and other SF Products, but do not include J-REIT. “Securitized products” mean those products by which corporations seek to raise funds primarily by applying a structure of one sort or another with the backing of specified assets only. “Derivative products” primarily mean repackaged bond products with relatively high creditworthiness in which derivative transactions are embedded. “Other SF Products” mean those products for which creditworthiness is enhanced primarily by applying a structure of one sort or another to corporate finance. 4/184 ©Rating and Investment Information, Inc. Summary of Rating Methodologies Chapter 1: General Chapter 1: General Subchapter 1: Positioning of Rating Methodologies and approach to structured finance products R&I’s rating methodologies are established in accordance with the Credit Rating Activities Basic Policy and the Rating Determination Policy. The rating methodologies prescribe the “rating approach” to be applied to credit ratings of structured finance products (hereinafter referred to as “SF Products”) on the basis of qualitative and quantitative logical systems. A credit rating for an individual transaction is assigned on the basis of these rating methodologies. The rating processes, procedures, specific calculation methods, etc., are prescribed in separate manuals. R&I is pleased to publish