It took one phone call from auditor Deloitte Touche Tohmatsu to convince Daiei Inc. to accept help from the state-backed Industrial Revitalization Corp. of Japan and end a lengthy standoff between the retailer and major banks.
The auditor told Daiei on Wednesday that it would not approve Daiei’s April-September earnings report, due out Friday, because the company was facing threats from creditor banks to stop extending financial assistance.
But why it took so long to figure out the fate of the giant retailer is not as easy to unravel.
Political concerns complicate a myriad of interests, including a conflict between the Financial Services Agency, which oversees banks, and the Economy, Trade and Industry Ministry, which guided Japan’s corporate miracle in postwar Japan.
The most affected have been funds and foreign firms that have spent millions of yen on analyzing Daiei’s assets in the hope of getting a chance to turn around the retailer. They could still be chosen as sponsors under the IRCJ-led bailout scheme, but their initiatives in the rehabilitation process have largely been cut.
Negotiations between Daiei and its three largest creditor banks stalled because Daiei refused to back down from its plan to revive itself with private-sector support. The banks insisted Daiei seek IRCJ help.
UFJ Bank, the smallest of the three main lenders, had secured a 700 billion yen capital injection from Mitsubishi Tokyo Financial Group in September, allowing it to better stomach a total loss of its loans to Daiei.
The banks could play hardball now, and accordingly threatened to withhold further assistance and force Daiei into bankruptcy.
Auditors are in close communication with FSA officials, and Tohmatsu’s interference at the critical juncture is widely seen as the result of the FSA’s influence.
Akio Makabe, visiting professor of economics at Shinshu University, describes the showdown between Daiei and its creditors as a “proxy conflict between the FSA and METI.”
The government has itself committed to halving the ratio of bad loans to total loans held at major banks to 4 percent by the end of March from above 8 percent in 2002.
After UFJ can sell Daiei’s loans to the IRCJ, the FSA can safely say that the government target is in sight.
At the end of September, UFJ held 4.6 trillion yen worth of bad loans, accounting for more than 10 percent of its total loans.
Loans handled by the IRCJ can be categorized as sound. Overnight, it transforms a poor loan portfolio into a good one.
But for METI, Daiei’s seeking of further government help is an admission of lax checks; METI had earlier approved Daiei’s application for tax exemptions under the Industrial Revitalization Law. Such exemptions are extended to troubled companies deemed otherwise viable.
METI Minister Shoichi Nakagawa therefore supported Daiei’s private-sector oriented turnaround plans, insisting that the private sector be allowed to make its own decision without public interference.
Bankers, who have seen Daiei through two debt-forgiveness packages already, say Nakagawa’s comment ignores their rights as creditors.
Still, fund managers, who have effectively lost out to the IRCJ, agree with Nakagawa.
“We could have designed a turnaround plan for Daiei without government help,” said Kenji Ueda, executive director at equity fund Ripplewood Japan Inc.
“We could have probably offered a higher price than IRCJ will,” said a manager at Deutsche Securities Ltd.
Both companies and other funds had voiced interest in arranging restructuring plans for Daiei.
Companies like U.S. retail giant Wal-Mart Stores Inc. and Japanese trading firm Marubeni Corp. are still likely to offer to become Daiei’s sponsors to assist the IRCJ’s restructuring.
“The fact is that the IRCJ has no experts in retail; it needs the private sector in the end,” an official at equity fund Cerberus said. “Turning around Daiei is going to be difficult — for anyone.”
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