(This is from an Asian financial news service I edit)
Japanese Bad Loan Market is Lucrative Business for U.S. Investors April 12, 2000
By Tim Shorrock, Asian Assets Direct Managing Editor
TOKYO – U.S. firms have made substantial profits buying and selling nonperforming loans in Japan since the country began tackling its bad debt problems in 1997, according to key players in the market.
“From a buyer’s point of view, there’s a very competitive environment in the NPL market right now,” said Mark N. Gabbay, vice president of the Tokyo branch of GMAC Commercial Mortgage.
GMAC is a unit of General Motors Corp. that has purchased over 2,000 nonperforming loans in Japan and lent to several foreign buyers of bad debt.
Two years ago, Gabbay said, buyers of nonperforming loans were earning 13 percent to 15 percent on their investments. But that figure has dropped to around 10 percent today, partly as a result of increased competition, he said.
In addition to GMAC, companies making money in Japan from transactions in bad debt include Morgan Stanley, Merrill Lynch, Cerberus Group and Lehman Brothers.
“In two years, they’ve made very good returns,” said Mark Grinis, managing partner with Ernst & Young Kenneth Leventhal Real Estate Group, which monitors bad debt in Japan and other Asian countries. “It’s a lucrative market.”
During an interview at E&Y’s headquarters in downtown Tokyo, Grinis would not provide exact figures on U.S. earnings in the Japanese market for nonperforming loans.
But he said most foreign investors here have made their profit by converting bad loans into cash – that is, earning revenue from the spread between the price they paid for a bad loan and their return for servicing the loan or selling the underlying collateral.
In 1997 and 1998, Grinis said, Japanese banks working with foreign institutions converted $120 billion of bad loans into $16 billion in cash. In 1999, $180 billion in debt was converted into $23 billion in cash. The cash figure for 2000 is expected to be over $25 billion.
Foreign companies are also making money as consultants to Japanese banks, which retain primary responsibility for disposing of the country’s nonperforming loans, and advising foreign buyers on valuation of assets.
“The person who gets the best information and figures out the value [of a distressed asset] wins the game,” said an executive with a U.S. asset management firm who asked not to be identified. “The information gap – that’s where you make the money.”
Some foreign companies are also making equity investments in troubled companies to keep them afloat and allow them to make badly needed capital injections.
On Monday, New York-based Cerberus said it would buy a 50 percent stake in supermarket chain Nagasakiya, which recently filed papers in a Tokyo court seeking protection from its creditors. Cerberus is also providing working capital to Dai-Ichi Kangyo Bank, the chain’s largest creditor.
Determining the total amount of bad debt in Japan has been difficult because banks have been reluctant to provide information that would lower the value of their stock, which is still closely intertwined with stock owned by corporations that belong to the same business groups.
The most common figure, obtained from the government-run Financial Supervisory Agency last year, is $1.1 trillion. Despite that huge amount, only two banks have failed since the Japanese “bubble economy” burst in 1991.
As a comparison, during the U.S. savings and loan crisis of the 1980s, 474 financial institutions holding $288 billion in bad debts failed. That makes the Japanese situation at least four times worse than the S&L crisis.
In Grinis’s view, however, the $1.1 trillion figure may be much larger.
In February, corporate bankruptcies were up 51 percent over the month before, with 1,400 companies declaring insolvency. Over the last three years, Japanese insolvencies have reached over $410 billion, compared to $50 billion a year at the peak of the U.S. S&L disaster.
A key factor in the rising numbers is new accounting and disclosure rules recently imposed by the Japanese government’s Financial Supervisory Agency.
“These insolvencies didn’t occur last year,” Grinis said. “The asset value was lost way before…It’s a safe bet the $1.1 trillion will grow as the FSA refines its supervisory process and identifies and targets more NPLs.”
New numbers for bad loans are certain to emerge as insurance companies, cooperatives and other financial companies begin to file the reports now required of the banks, he said.
Unlike South Korea, where a single entity, the government-run Korea Asset Management Corp., sells bad loans, the task in Japan is spread across several agencies.
Monitoring bad debt is primarily the job of the FSA. Another agency, the Resolution and Collection Corp., sells nonperforming loans but so far has only sold single loans. It may start selling bad loans in bulk, as KAMCO has done, but has yet to announce its intentions.
That bothers some observers.
“If the RCC fools around for 10 more years, I’m not convinced we’re going to have a speedy recovery here,” said Grinis, who once worked for the U.S. Resolution Trust Corporation. “Hopefully the FSA will become a fierce regulatory body” like the RTC, Grinis added. “That’s the best hope for Japan.”
The RCC is “a huge question mark for the future,” said Gabbay of GMAC. “Will they try to make a profit in selling their loans in the bulk market or trying to work them out themselves?”
In recent months, said Gabbay, potential sellers of bad loans have been holding back their product hoping to get a better price for their assets.
At the same time, he has seen “increased competition for special services looking to get into the market.” This includes Japanese companies, “who are very interested in aligning themselves in the market and working through the asset management side of the business.”
Grinis and Gabbay spoke at a seminar last week on Japanese distressed assets presented by Global Management and Communication, a Tokyo company that assists Japanese firms trying to learn about foreign business practices.