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The state-run Deposit Insurance Corp. will buy loans from Shinsei Bank to Sogo Co. and then waive a substantial portion of them to help rehabilitate the struggling department store operator, DIC sources said Saturday.

The step is expected to pave the way for Sogo to reach an agreement with creditor banks on its request for forgiveness of loan repayments totaling 631.9 billion yen.

Shinsei’s reluctance to waive loans to Sogo has been a major stumbling block to the department store operator’s rehabilitation plan.

Loans owed by Sogo to Shinsei, formerly the Long-Term Credit Bank of Japan, total 200 billion yen. Shinsei has set aside loan-loss reserves against 100 billion yen of the total, while Sogo has asked Shinsei to waive 97 billion yen.

The LTCB, which collapsed and was put under state control in 1998 due to huge loan losses, was sold to an international consortium led by Ripplewood Holdings LLC on March 1. It restarted operations June 5 as Shinsei.

As early as next week, Shinsei will formerly ask the DIC — the nation’s banking industry safety net — to buy the loans under the contract between the government and the consortium on the purchase of the LTCB, the sources said.

The contract obliges the DIC to buy back any outstanding loan held by Shinsei at the March 1 book value if its market value falls by more than 20 percent.

The accounting firm used by Shinsei Bank has judged the value of the loans made to Sogo have dropped by more than 20 percent, the sources said.

If an accounting firm for the DIC confers, the DIC will buy back the loans and accept Sogo’s request to forgive part of them, they said.

The DIC is asking Sogo’s creditor banks to allow Sogo to first repay the remaining DIC loan before other loans, the sources said.

Sogo fell into financial trouble due to the failure of its business expansion plans during the asset-inflated bubble economy of the late 1980s.