While the economy still shows mixed signs of recovery, small companies are engaged in a struggle for survival. Japan’s economic fortunes hinge on the successes of small companies, including venture businesses, and their activities need to be watched closely.
In a recent poll of small businesses conducted by the Ministry of International Trade and Industry, however, a quarter of the respondents complained of the reluctance of banks to offer loans. Small companies are having difficulty raising capital.
In this financial environment, the Tokyo Metropolitan Government has launched a scheme to help cash-strapped small firms raise capital through a new type of security, known as collateralized loan obligations (CLOs), beginning this spring. This has opened the way for small companies to raise capital through bonds, as well as through bank loans. Tokyo Gov. Shintaro Ishihara, keeping an election pledge, created a local market for trading bonds issued by such companies. Osaka Prefecture is also considering a different method of helping small companies raise capital. Moves by local governments to take a leading role in financial policymaking are much appreciated as a way to help stimulate local economies.
Under the CLO system, banks offering new loans to small companies sell the credits to trust banks. Trust banks transfer their rights to companies that issue bonds, with the rights as collateral, and sell them to institutional investors. Because all such loans are backed by the Tokyo Credit Guarantee Association, companies applying for loans must meet the credit-guarantee requirements.
This method securitizes loans for sale to investors and differs from bond issues that large companies typically use to raise funds. The cost of issuing bonds is too high for small companies, which do not have the good credit standing that large companies enjoy. It would be difficult to create a market for bonds issued by small companies. But the new scheme developed by the Tokyo Metropolitan Government is both well-conceived and original.
The new system enables small companies to raise funds of up to 50 million yen, to be repaid three years later when the bonds mature. Companies thus do not have to fret over monthly repayments, as they do with bank loans. Under the plan, some 68 billion yen was raised in March on behalf of 1,600 companies through new bond issues. Many companies also took part in the scheme in April.
The new market differs from the traditional bond market in that securitized loans are backed by credit guarantees. Investors do not have to worry about risks because the credit-guarantee association will repay the loans on behalf of companies if they go bankrupt. Some critics, therefore, say that the system is little different from the central government’s credit guarantee of more than 20 trillion yen for bank loans.
No rush to judgment should be made on this scheme, however. Unlike large corporations, small companies have been reluctant to disclose financial information. The Tokyo Metropolitan Government is creating a database on small businesses. If that encourages investors to become more selective about companies, companies will be under pressure to disclose more information. This should lead to the transformation of this new bond market into an ordinary bond market over the long term.
The securities market for small companies should not be part of a short-term plan to deal with the banks’ reluctance to extend loans. It should be developed under a long-term project for nurturing small businesses. To attain that goal, greater and more focused efforts must be made to build trust in the CLOs. Such efforts should include a stricter screening of bonds for trading on the basis of credit-guarantee standards.
While some shares of Internet-related small businesses have fetched sky-high prices on the stock market, others have plunged. The new bond market should be free from such a “bubble.”
The Japanese economy as a whole continues to present a mixed picture. The employment situation remains bleak, as evidenced by a nearly 5 percent unemployment rate in recent months, the highest since the government began tracking jobless figures. Personal income is leveling off as consumers keep their purse strings tight. To put the economy on the road to a sustainable recovery led by private demand, it is also essential to create schemes that help small businesses overcome the impact of the long recession. Tokyo’s launch of a new type of local bond market is expected to be a model for other local governments.
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