The state-run Deposit Insurance Corp. announced Friday it will buy 197.6 billion yen of Shinsei Bank’s outstanding loans to troubled department store chain Sogo Co. and waive 97 billion yen of that amount.
The Financial Reconstruction Commission, which oversees the DIC, approved the proposed purchase and partial forgiveness of Sogo’s loans at an extraordinary meeting held earlier in the day.
The loans in question were extended by the defunct Long-Term Credit Bank of Japan, which was sold to a private-sector consortium led by U.S.-based Ripplewood Holdings LLC. The bank was renamed Shinsei Bank on June 5.
The DIC’s decision, which paves the way for the realization of Sogo’s plan to have 630 billion yen of its debts forgiven by 73 creditor banks, is sure to spark controversy. Some observers have already raised eyebrows at the idea of the state paying for private enterprise management mistakes.
The measure is also expected to ignite fears of further debt-waiver requests from struggling borrowers indebted to Shinsei.
But DIC Gov. Noboru Matsuda stressed Friday’s decision was an “exceptional” case based on the DIC’s priority to minimize cost to the public.
Had the DIC refused the debt waiver, which would have halted Sogo’s reconstruction plan, the department store chain would surely have gone bankrupt, Matsuda said. This would have made the recovery of its remaining loans to Sogo — totaling 100.6 billion yen — impossible, he added.
Matsuda also said the DIC will ask former Sogo Chairman Hiroo Mizushima to clarify his management responsibility by measures including turning over some of his personal assets.
Matsuda outlined criteria for complying with a debt forgiveness request from a private company. The criteria are:
* Whether the DIC’s refusal of the debt waiver request would prompt liquidation of the firm;
* Whether the debt waiver would boost the DIC’s chances of recovering the remaining loans;
* Whether the legal liquidation process may trigger social disorder through a chain of bankruptcies;
* And whether the firm has taken measures to clarify responsibility for the financial failure.
Under the debt-waiver scheme, the DIC has an advantage over other creditor banks. While other creditors would collect their remaining credits over the next 30 years, the DIC has gained a concession from Sogo to have the remaining 100.6 billion yen in loans repaid in 12 years.
To ensure that this occurs, the Industrial Bank of Japan, which is the department store chain’s main bank and was instrumental in Sogo’s compilation of its business revitalization plan, will pay the DIC the 30 billion yen it receives from Sogo on its own loan collection.
The DIC’s purchase of 200 billion yen in Shinsei’s outstanding loans to Sogo is based on a Feb. 9 agreement between the DIC and the Ripplewood-led consortium. The agreement states that, if the buyer of the bank determines that the market value of loans taken over from the LTCB has fallen by more than 20 percent from the book value in three years, the buyer can request that the DIC buy the loans back at book value.
Based on this agreement, Shinsei Bank asked the DIC to buy the Sogo loans back on Thursday. The DIC immediately examined the request and determined that the value of outstanding loans with a book value of 197.6 billion yen held by Shinsei Bank had indeed plunged by more than 20 percent.
Shinsei Bank has put up a 99.9 billion yen loan-loss reserve for the problem Sogo loans, which will also be taken over by the DIC with the loans. Therefore, the DIC will actually pay some 100 billion yen to Shinsei Bank, DIC officials said.
As a result, the planned 97 billion yen debt forgiveness will not force the government to immediately incur a loss equivalent to the forgiven amount, they added.
But the government would be in danger of losing the remaining claims should Sogo fail to earn enough profits.
The Democratic Party of Japan has pointed out the danger, saying the government may have to cover Sogo’s remaining debts should the firm fail to return to profitability.
Sogo boss thankful
Kyoichi Yamada, president of Sogo Co., expressed his gratitude Friday for the Deposit Insurance Corp.’s decision to forgive debts to the major department store operator, calling it the first step toward reconstruction of the company.
“We would like to apologize for our request to forgive huge amounts of debts and thank (the DIC) for extending enormous support to us. This (decision) enables us to make an important step in rebuilding our business,” Yamada said.
While saying that Sogo’s management deeply regrets the excesses of the late 1980s, Yamada said that the firm will make utmost efforts to rebuild the company.
“We will make our best efforts to complete our reconstruction plan and repay the remaining debts as soon as possible. It is our responsibility to carry out the plan,” Yamada said.
At the same time, Yamada stressed that the company will turn itself into a department store that can respond to consumer demands by promoting young employees and women.