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Tuesday, Feb. 20, 2007
INDUSTRIAL REVITALIZATION CORP. OF JAPAN
Assessing IRCJ, the government's bailout body
The government-backed bailout agency Industrial Revitalization Corp. of Japan will finish its work and close its doors as early as next month, a year earlier than planned. Since it was established in April 2003, the bailout body has helped debt-ridden companies, including major supermarket chain Daiei Inc. and cosmetics maker Kanebo Ltd.
Following are some basic facts about the body:
What is the IRCJ and why was it set up?
After the collapse of the asset-inflated bubble economy in the early 1990s, many companies ended up saddled with huge debts. The IRCJ was established to help them turn themselves around.
In April 2003, the IRCJ was launched jointly by financial institutions nationwide with capital of about 50 billion yen. In addition, the government provided the IRCJ with 10 trillion yen to buy up the loans of ailing companies in two years.
The law that created the IRCJ set a five-year term to March 31, 2008, to carry out its mission. However, its last project, Skynet Asia Airways Co., is expected to be completed by the end of this month when the IRCJ sells the carrier's shares to a consortium including Miyako Holdings Co., All Nippon Airways Co. and others.
Once this final project is completed, the IRCJ is expected to disband in March.
How did the IRCJ help ailing companies?
In addition to a main bank, most Japanese companies also have secondary banks financing them. Under the IRCJ's support plan, the agency becomes a major stakeholder by buying up loans held by the secondary banks, allowing the IRCJ and an ailing company's main bank to jointly work on restructuring plans.
Who was involved with its rehabilitation projects?
The IRCJ hired various experts, including lawyers, consultants and accountants from the private sector. However, it didn't hire bankers for fear they might give favorable treatment to banks buying up loans from the secondary banks.
According to an IRCJ official, the agency had more than 200 employees at its peak. However, because almost all of the projects have been completed, many staff have already left.
What kind of companies did the bailout body support?
The rehabilitation of big companies such as Daiei and Kanebo received a lot of attention, but most IRCJ projects involved small and medium-size companies.
All told, the IRCJ assisted 41 ailing companies, far short of the 100 or more initially targeted. In only six cases did debts amount to more than 100 billion yen: Dia Kensetsu Co., Mitsui Mining Co., Kanebo, Daikyo Inc., Daiei and Misawa Home Holdings Inc.
Did the IRCJ succeed in turning them around?
The opinions are split.
The IRCJ mainly decreased interest-bearing debts that companies were suffering from in the form of debt waivers.
It also helped them sell off businesses that were not part of their mainstay operations so firms could focus on key pursuits. But critics say the IRCJ mainly improved firms' balance sheets and failed to turn them back into the black.
For example, under the restructuring plan of Daiei, which was placed under IRCJ control in December 2004, the retail chain sold businesses unrelated to its main supermarket operations, including restaurants and leisure facilities, while closing unprofitable stores. The IRCJ also asked Daiei's main lenders, including UFJ Bank, which is now Bank of Tokyo-Mitsubishi UFJ, for debt waivers.
Last November, the IRCJ sold Daiei's shares to sponsor companies -- trading firm Marubeni Corp. and buyout fund Advantage Partners Inc., now Advantage Partners LLP -- handing over its task to rehabilitate the supermarket giant to the private sector.
Through its restructuring program, Daiei managed to reduce its interest-bearing loans to 739.3 billion yen in November, from about 1.462 trillion yen in August 2004.
Last April, the company announced it had returned to the black in the year that ended last Feb. 28, generating a net profit of 413.2 billion yen against a net loss of 511.12 billion yen a year earlier. But on an unconsolidated basis, the company still suffered from a pretax loss of 2.96 billion yen. Analysts say the IRCJ program worked well in clearing the company's debt, although the retailer remains competitively weak.
Did the IRCJ make money in the end?
It recorded 22.2 billion yen in profit at the end of last fiscal year as it sold shares of 25 companies by March 2006 to sponsor companies, and earned capital gains.
For fiscal 2006 ending this March 31, media reports said the IRCJ is expected to book 20 billion yen in profits through sales of Daiei shares in the current fiscal year. Also, the listing of Miyano Machinery Inc. on the second section of the Tokyo Stock Exchange is expected to give the IRCJ 10 billion yen in profit.
In total, the IRCJ is likely to book 30 billion yen to 40 billion yen in carried-forward profit when it is disbanded next month.
After the IRCJ is disbanded at the end of March, what happens to the people who worked for the government-backed body?
Some members who have finished their projects have already left the IRCJ. Some started investment funds and consulting firms, similar to a small version of the IRCJ, taking advantage of their experience at the government-backed body. There is also growing speculation that its president, Atsushi Saito, will become president of the Tokyo Stock Exchange.
Did the IRCJ manage to avoid burdening taxpayers, and did it fulfill its mission?
When the IRCJ was launched, some feared that taxpayers would bear the financial burden if the ailing companies failed to turn around. But thanks partly to the economic recovery and the stock market upturn, the IRCJ is likely to post profits.
Some critics say the IRCJ has only helped debt-ridden companies cut personnel, close unprofitable units and free them from debts. In other words, it only managed to clear up their balance sheets, while it still remains to be seen whether the companies' business performances have recovered sufficiently to ensure their survival.
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