A panel of deputies from the government, the Japanese Bankers Association and the Japan Federation of Economic Organizations (Keidanren) has drafted guidelines to be observed when a bank forgives a corporate borrower’s debts, panel sources said.

The draft calls for granting debt waivers only to corporate borrowers likely to return to the black within three years if it appears possible that the company will be able to eliminate its negative net worth within five years, the sources said Tuesday.

A negative net worth is a financial state where debts outweigh assets. In postbubble Japan, many firms’ assets are smaller than they appear due to latent losses in their securities and loan portfolios.

The draft guidelines also call for granting a debt waiver to a borrower only when another company has already stepped forward as a fresh capital contributor ready to help the borrower rehabilitate its management, they said.

Several creditor banks and their large borrowers given debt waivers have remained under severe criticism due to the debtors’ inability to revive profitability.

The norms were drafted by a study group led by Dokkyo University professor Jinzaburo Takagi that was commissioned to draft them.

The draft is an interim report to be adopted at the end of June.

Keidanren has been demanding that the study group include a clause that would require top managers at a corporate debtor given a debt waiver to resign, with an eye to preventing debt waivers from being given too easily.

But the draft stops short of adding the requested clause for fear that such managers would refuse to ask for a debt waiver from creditor banks due to wariness over giving up their posts.

The draft norms instead carry an ambiguous expression that senior managers should resign in general in exchange for a debt waiver.

The absence of an absolute requirement that senior managers give up their posts may come in for criticism down the track, financial analysts added.

The draft norms also call for shareholders to take responsibility through capital reductions, under which the value of their shareholdings would be cut, they said.

The norms are designed to have both managers and shareholders take responsibility for management blunders.

that plunge a borrower into a financial state so poor as to require a debt waiver.

The draft mandates that corporate borrowers clear certain numerical criteria and find a capital contributor in order to become entitled to a debt waiver to ensure its management reconstruction plan be definitely implemented, they said.

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