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The number of contenders for a controlling stake in Aozora Bank was effectively trimmed Friday to two — U.S. private equity fund Cerberus K.K. and the Sumitomo Mitsui Financial Group.

The bank’s executives took the action after examining four bidders’ business plans for Aozora during an extraordinary board meeting.

Cerberus and SMFG are competing for a 49 percent stake in Aozora that Softbank Corp. is trying to sell in order to fund its fledging broadband service.

Aozora will now disclose financial information for evaluation and analysis, before the potential suitors settle down to negotiate a final price.

Germany’s HypoVereins Bank, one of the two other bidders, expressed its intent to drop out of the race.

Regarding the other, GE Capital Corp., Aozora said it will not disclose further information until the U.S. financial giant presents a more comprehensive business plan.

While the two main contenders remain head-to-head coming out of the final turn, they are likely to receive little information from Aozora during their due diligence inspections, according to observers.

In case Cerberus ultimately obtains the 49 percent stake, on top of its current 12 percent stake, Aozora does not want to provide SMFG with information on when clients’ loans expire.

The bidding for Aozora, the former Nippon Credit Bank, is receiving close scrutiny both at home and abroad as a measure of how open Japan’s financial markets are to foreign investors. NCB was nationalized in December 1998 and has close ties with regional banks and institutional investors since it funds its lending through debentures.

NCB was reborn as Aozora when it was sold to a consortium led by Softbank, Orix Corp. and Tokio Marine & Fire Insurance Co. in 2000.

Currently, ownership of Aozora is divided between Softbank, 49 percent; Orix and Tokio, 15 percent each; Cerberus, 12 percent; and regional banks and other stockholders, 9 percent.

The Financial Services Agency has openly opposed a sale to Cerberus, painting it as a short-term investor that would sell its stake as quickly as Softbank, without concern to borrowers.

“It would be just like Shinsei Bank (owned by U.S. private equity fund Ripplewood LLC),” fumed one FSA official. “It won’t bear in mind banks’ ‘obligations to society.’ “

Shinsei Bank, the former Long Term Credit Bank of Japan, has actively cut off deadbeat borrowers while growing a profitable operation — a rarity in Japan’s banking sector.

What’s more, the FSA has recently thrown a potential hurdle in front of Cerberus in the form of a new rule stating that any investor with a 20 percent or larger stake in a bank needs its approval.

SMFG’s bid comes as it tries to accelerate the disposal of its dud loans, which will dig into its capital.

Aozora had a high capital-to-asset ratio — about 13 percent — at the end of September. It is thought that by putting Aozora under its wing, SMFG would slightly boost its capital-to-asset ratio, which stood at 10.3 percent as of Sept. 30.

SMFG has recently conducted aggressive maneuvers aimed at boosting its capital and gaining market credibility. Last week, SMFG unveiled a plan to procure 150.3 billion yen from U.S. investment bank Goldman Sachs Group Inc.

At any rate, Cerberus is likely to block SMFG from taking a 51 percent stake in Aozora by increasing its own stake through its right of first refusal.

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