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Tuesday, Sept. 28, 1999

Analysis: LTCB sale prelude to industry reforms


Staff writer

The long-awaited sale of the failed Long-Term Credit Bank of Japan to a foreign investor group is likely to throw the nation's banking industry into another era of fierce competition and sweeping reform.

The Financial Reconstruction Commission announced Tuesday that it has selected an investor group organized by U.S. investment house Ripplewood Holdings L.L.C. to buy the LTCB. This means that a major Japanese bank with assets exceeding 10 trillion yen will come under foreign ownership.

While many more hurdles must be cleared, Tuesday's decision is significant in that it will promote further reforms of the financial industry, analysts say.

"(The decision) demonstrates the playing field for foreign financial institutions in Japan has leveled," said James Fiorillo, analyst at ING Barings Securities. "Even nationalism will not be allowed to interfere with the appropriate rehabilitation of the sector, even if it means selling state assets to foreign firms."

Ripplewood, a U.S. private equity firm set up in 1995, is known for its "industrial partnership" approach, through which it picks an attractive company, buys its stocks with a pool of funds from investors and lets an expert run the firm.

So far, Ripplewood has invested in 35 companies with a total value of nearly $2.5 billion.

For the LTCB buyout, Ripplewood has brought together investors such as AMN-Amro Bank, the Bank of Nova Scotia, Deutsche Bank, GE Capital, Mellon Bank and the Paine Webber Group, the firm said.

Under the leadership of Masamoto Yashiro, a former head of Citibank Japan, and with partnerships with western financial institutions with cutthroat financial expertise, the LTCB will be reborn as a powerful, profitable investment bank, according to Ripplewood's plan.

Instead of relying on lending like the old LTCB, the new bank will offer financial products and services such as securitization, investment banking and mergers and acquisitions, Yashiro told a news conference.

Such a turnaround will accelerate changes in the nation's banking sector, ING Barings' Fiorillo said.

"Ripplewood will put the LTCB through a type of restructuring not yet seen in Japan," he said. "I think the pressure on other banks to follow suit will be pretty intense."

But experts are quick to point out big challenges lying ahead. For example, the new management will be faced with the task of raising profitability as promised while being barred from certain activities that it would normally be allowed.

The bank will not be able to sell the bank's assets or "drastically collect" loans for the three years after the deal is officially closed. This was agreed at the request of the FRC, which feared that the LTCB's borrowers -- including major retailers and general contractors -- might have their loans discontinued otherwise.

Also, for the next five years, the new bank's management will have to consult with the state-run Deposit Insurance Corp. before selling securities holdings.

The biggest block to negotiations over the sale of the bank was how or whether to share the burden in case more of the LTCB's outstanding loans go sour.

During negotiations, Ripplewood proposed setting in advance the sharing of the burden between the firm and the Japanese government. But the FRC hesitated, because the law governing the commission did not have provisions for such an advance arrangement.

In the end, the two parties came up with a set of compromises, including one that will require the DIC to buy loan claims back if the loan value drops by 20 percent or more over three years.

The deal left some experts wondering about the transparency of loan-loss sharing rules. One analyst, who refused to be named, said the deal lacks transparency, adding that the parties did not agree within the legal parameters set forth by the Financial Reconstruction Law.

Meanwhile, another analyst, Koya Hasegawa of Warburg Dillon Read, said that the FRC and Ripplewood have sorted the issue out by stipulating conditions for the government buyback of sour loans.

It remains unclear whether the rules agreed this time will be applied in future negotiations of other failed banks, including Nippon Credit Bank. FRC Chairman Hakuo Yanagisawa indicated in a news conference that, while the LTCB scheme is a good model, the commission will have to debate the rules again as the negotiations for the NCB selloff progress.



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