The performance of Japanese transactions backed by golf courses is stable, according to a new report by Moody's. The rating agency expects the net operating income of its rated portfolios to be stable, as operators strive to maintain earnings and constrain costs.

Over the medium term the number of rounds should be stable following a recent period of limited growth, which should mitigate the continuing decline in revenue per round. Moody's says a number of course operators have been able to protect profitability in the face of persistent stressed business conditions, which has made for stable asset performance.

Course numbers have not changed for a decade, as limited new supply has been offset by closures due to bankruptcy. No new major supply is expected that would negatively affect the current balance between supply and demand.

The number of rounds being played has been increasing slowly since 2004 and Moody's expects baby-boomers taking up the game to help keep levels stable over the medium term. The agency says any decline in the number of rounds could translate into a decline in the number of rounds per course, likely polarising the industry between courses that can retain competitiveness and those that cannot.

Profitability will be stressed by the ongoing decline in revenue per round and, even with demand remaining stable, it is expected that raising revenue will be difficult. Moody's says operators must keep a stable number of rounds and price strategically to mitigate against this.

The portfolios in its rated transactions have alleviated negative impacts on profitability, with 'occupancy' rates 30% higher than the market average, thanks to good management. Furthermore, operators have maintained earnings and constrained expenses by cutting costs and maintaining stable net operating income almost equivalent to Moody's estimates, and the agency expects net operating income to be stable.

Prices are expected to normalise following a recent spike, because buyers should become more selective in their investments. The ratio of net cashflow to debt in Moody's rated transactions is high because portfolio returns are high. Consequently, the agency says, stable cashflow is supporting steady amortisation and mitigating balloon risk.

Portions of Moody's-rated transactions have been prepaid in full before maturity, from which the agency infers that the lenders providing refinancing have evaluated the portfolios' stable cashflow and steady deleveraging positively.