As Prime Minister Shinzo Abe’s stimulus helps push banks’ lending rates under 1 percent, funds are targeting a debt market paying 10 times that.
Japanese banks have cut loans to smaller companies as global regulations get tougher, while a government crackdown on excessive interest rates has curtailed funding from consumer lenders, according to official data. That’s opened up a market valued at tens of trillions of yen, according to Tomoaki Tsutsumi, co-chief executive officer of Keystone Partners Co.
Keystone’s loan fund charges rates of about 10 percent, Tsutsumi said. That compares with average interest of 0.905 percent in June on new lending by banks, according to Bank of Japan data. The average interest margin on dollar loans in the Asia-Pacific region excluding Japan was at 2.38 percentage points, according to data compiled by Bloomberg.
“Banks used to lend aggressively to small- and medium-sized companies, but because they’ve cut back, there’s a huge vacuum out there,” Tsutsumi said in an interview at the debt fund management firm’s headquarters in Tokyo. Keystone has raised ¥15.4 billion ($150 million) for its second loan fund from investors, he said.
Topaz Capital Inc., a Tokyo-based debt fund manager, has said it is in the process of raising ¥20 billion from investors for loans in Japan. The fund, which hasn’t started lending yet, is seeking 6 percent to 8 percent rates from companies and is in the process of doing due diligence on two deals, according to Koji Shigemitsu, a partner at Topaz.
“There aren’t many investment products that offer a middle-risk and middle-return profile,” Shigemitsu said in an interview.
Overseas private debt operators including Blackstone Group LP and 3i Group Plc are also raising money from Japanese investors for overseas loan funds.
Dan Smith, a senior managing director at Blackstone who helps oversee credit strategies at the company’s GSO Capital Partners LP unit, said in February that Japanese investors accounted for about $6 billion to $7 billion of funds raised for mainly lower-grade, U.S.-based loans.
London-based 3i Group, Britain’s oldest private-equity firm, has been tapping money in Japan from investors for overseas loan funds during the past 12 months, according to Jeremy Ghose, the chief executive officer of 3i Debt Management Investments Ltd.
“Japan remains a very important market for us from a fundraising point of view,” Ghose, a former executive at Japan’s Mizuho Financial Group Inc., wrote in an email. “We are expecting more new investors in the next six to twelve months. Our name recognition in the Japanese market is spreading.”
3i Debt had about $11 billion in funds under management at the end of March.
Regulations that require Japan’s biggest banks such as Mitsubishi UFJ Financial Group Inc. to boost capital against riskier loans has helped cut lending to small- and midsize businesses by about ¥8 trillion to ¥125.1 trillion in the past five years, BOJ data shows.
The decrease comes even as total bank lending rose 2.3 percent from a year earlier in June, matching the fastest pace of gains since June 2009, according to central bank data.
Borrowing costs have come down as the BOJ buys an unprecedented ¥7 trillion of sovereign notes a month to spur inflation. The new loan rate dropped to 0.779 percent in May, the lowest in BOJ data going back to 1993.
Japan’s benchmark 10-year bond yield has declined 20 basis points, or 0.2 percentage point, this year to 0.535 percent. The yen has strengthened 2.4 percent in 2014 to ¥102.80 per dollar as of 10:32 a.m. Thursday in Tokyo, after sinking 18 percent last year in the wake of the BOJ’s monetary stimulus.
Lending by nonbank consumer finance companies to business owners fell ¥21.7 trillion to ¥16.5 trillion at the end of March in 2013 from 1999, according to data from the nation’s Financial Services Agency. A government crackdown on lending practices started in 2006. That and the introduction of interest rate and loan caps led to the bankruptcy of Takefuji Corp., and pushed rivals Acom Co., Promise Co., and Orient Corp. into closer capital tie-ups with the nation’s biggest banks.
Regulations which came into force in June 2010 capped interest rates at 20 percent and prohibited lending to borrowers with consumer debt equal to a third or more of their annual income. The maximum rate had been 29 percent.
Japanese banks are willing to lend to lower-rated companies that have plans for growth, Nobuyuki Hirano, the president of Mitsubishi UFJ and chairman of the Japanese Bankers Association, said at the lobby group’s news conference.
Keystone isn’t sure how much risk those lenders are ready to assume.
“The lending attitude of banks has become aggressive because of Abenomics, but the total risk they’re taking hasn’t changed much,” Keystone’s Tsutsumi said. “That’s why people come to talk to us” about loans, he said.