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Refunds on Overcharging Spur Acom Bond Risk to January High: Japan Credit

Bond investors are snapping up insurance on Promise Co. and Acom Co.’s debt as borrowing costs rise for Japan’s biggest consumer lenders and their loan business dwindles amid a government crackdown on overcharging.

Five-year credit default swaps covering Acom’s bonds rose to 457.4 basis points on Sept. 23, the highest since January, according to CMA data. Contracts insuring Promise’s debt on Sept. 14 reached the most expensive relative to global peers since May 12, the data show.

Higher borrowing costs and a regulatory clampdown that caps loan rates at 20 percent from as much as 29 percent are reducing profitability, with Promise’s net interest margin falling to a record low in the year ended March, according to data compiled by Bloomberg. The companies are trimming loans as they accumulate cash to repay customers who were overcharged interest before the law change, and as household spending fails to recover from the earthquake that hit north of Tokyo in March.

“Consumer lenders are in a downward spiral as they are forced to reduce lending in an effort to secure their own funding,” said Yasuhiro Matsumoto, a Tokyo-based senior analyst at Moody’s Investors Service. “It could take two or three years before their customers’ claims for overcharged interest dry up.”

The average coupon on Acom’s bonds increased 59 basis points to 2.66 percent since the end of 2009, and Promise’s rose 38 basis points to 3.08 percent, according to data compiled by Bloomberg. Companies in the benchmark Topix stock index currently pay a 1.54 percent average coupon, the data show.

Unlike Takefuji

Credit-default swaps on the two companies’ bonds have still declined by the most in Japan this year, as investors bet they will avoid following rival Takefuji Corp. (8564) into bankruptcy. Unlike Takefuji, which collapsed in September 2010, Promise and Acom are backed by major Japanese banks that have pledged to maintain support.

The two lenders are using different strategies to obtain credit. Promise, which only sold bonds once in the past three years, is relying on loans from its biggest shareholder, Sumitomo Mitsui Banking Corp., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest financial group. Acom is continuing to sell bonds even as interest rates climb, in addition to receiving loans from banks including Mitsubishi UFJ Financial Group Inc., its largest shareholder.

Promise has no plans to raise funds through bond sales “for the time being,” said Hiroshi Takada, a company spokesman, citing the recent increase in the cost of insuring the lender’s notes. “Along with internal reserves we have built over the past several months, we are focusing mainly on loans from banks led by Sumitomo Mitsui.”

Bond Sales

Promise last sold bonds in April 2010, when it issued 10 billion yen ($131 million) of five-year notes with a 3.5 percent coupon, Bloomberg data show. Acom has sold three bonds this year on top of five in 2010. The most recent was a 15 billion yen note maturing in two years that pays a coupon of 3.85 percent, the highest among Acom’s 18 issues outstanding.

The increases in consumer lenders’ borrowing costs contrasts with a drop in corporate and government bond yields as a slowing global economy spurs demand for debt. Japanese corporate bonds yielded 1.13 percent on Sept. 6, matching the lowest since May 16, according to Nomura Securities Co.’s Bond Performance Index. The yield on Japan’s 10-year government bond touched 0.965 percent on Sept. 22, the lowest this year, and was 0.975 percent at 11 a.m. in Tokyo.

Bond Yields

The extra yield investors demand to hold Japanese corporate bonds, excluding power companies and banks, instead of government debt was 22 basis points on Sept. 23, after reaching a post-quake high of 27 basis points on May 11, according to Bank of America Merrill Lynch’s Japan Industrial Index.

The Markit iTraxx Japan index rose 15 basis points to 199.5 on Sept. 22, according to CMA data. Five-year contracts on Japanese government debt jumped 22 basis points last week to a record 142, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

“We’ve been sticking with our funding strategy, where 40 percent comes from finance like bond issuance and 60 percent is from bank loans,” said Takashi Kiribuchi, a Tokyo-based spokesman for Acom.

Assure Investors

The company had 253 billion yen in liquidity as of June 30, including a 100 billion yen commitment line with banks including Mitsubishi UFJ, compared with 230 billion yen of debts due to be repaid over the next year, Kiribuchi said. “This is part of our efforts to assure investors, some of whom might have concerns over our financial stamina.”

Demand for consumer loans may weaken as a rebound from the March 11 earthquake loses steam. Japanese have cut spending for 10 months and now face prospects of an economic slowdown as Europe’s debt crisis deepens and the U.S. recovery wanes. Bank lending has shrunk for 21 months, the longest streak of declines in six years, Bank of Japan data show.

“Dimming prospects for Japan’s economy, coupled with the tougher consumer-lending regulations, is deterring borrowers from seeking more loans,” said Kiyoko Ohora, a Tokyo-based director at the financial institutions ratings division of Standard & Poor’s. “Demand for consumer loans may bottom out in the next fiscal year, and competition among lenders will probably become more severe in a shrinking market.”

As well as capping interest rates, the law introduced last year restricts loan sizes to a third of a borrower’s annual income.

Loans Less Profitable

Promise’s net interest margin, a gauge of loans’ profitability, shrank to 13.7 percent in the year ended March, the lowest since Bloomberg began compiling data in 1995. Acom’s slid to 15.5 percent, the smallest in at least 11 years, the data show. Both companies posted losses last fiscal year.

Loans outstanding at Promise declined to 920 billion yen as of March 31, the lowest fiscal year-end balance since 1997, Bloomberg data show. At Acom, loans tumbled to 1.1 trillion yen, compared with the 2 trillion yen peak in March 2003.

While loans are declining, so is the number of customer claims for refunds of excess interest, a trend that helped shares of the two companies climb this year. Acom has risen 40 percent on the Tokyo Stock Exchange since Dec. 31, and Promise has advanced 8.6 percent. The Topix index has dropped 19 percent.

Customer requests for repayments of interest overcharged by Promise declined to 8,900 in August after climbing to 16,400 in March, according to Takada. Acom’s claims dropped to 7,500 in August from as high as 16,500 in February, Kiribuchi said.

“With interest-refund claims decreasing over the past year, the risk that consumer lenders will go bankrupt or won’t be rescued by banks diminished dramatically,” said Akira Nomura, a credit analyst overseeing the consumer-lending industry at Mizuho Securities Co. in Tokyo. “They’re still faced with a big issue, which is how to craft a business strategy and pursue growth in a shrinking market.”

To contact the reporters on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net; Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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