Ge Capital's Tokyo Treasure Hunt

It may buy tens of billions' worth of assets in the next few years

Japan's weekly tabloids have been ranting about how foreigners have been trying to take over Tokyo's financial markets. Now, they really have something to get excited over. On Jan. 24, in the biggest foreign buyout on record in Japan, GE Capital Corp. snapped up $6.5 billion worth of assets from Japan Leasing Corp., an affiliate of Long-Term Credit Bank of Japan. The Japanese tabs may have lots more to write about as GE's finance unit continues to hunt for bargains.

Since Asia's economic meltdown began, GE Capital has been shopping for assets. In 1998, it bought about $1 billion worth of Thai auto loans for half their face value, and it's part of a group that's angling to take over Korea First Bank.

But a beachhead in Japan is key to GE Capital's goal of boosting Asian earnings from 1% of net today to 10% by 2001. "Japan is clearly the single largest opportunity for us right now," says GE Capital President Denis J. Nayden. "The opportunities are sizable, and they're coming very fast." Analysts say GE Capital could invest up to $60 billion in Japanese assets over the next few years.

ALLIANCES. GE has an eye for distressed financial assets. It was the top buyer of Resolution Trust Corp. assets during the U.S.'s thrift crisis, and it invested more than $30 billion in Europe in the early 1990s. "They go in when it's ugly, and they turn it around," says Prudential Securities analyst Nicholas P. Heymann.

Now, Japan's Ministry of Finance is allowing deals with foreign investors such as GE to help revive Japan's shattered financial industry. On Jan. 27, a spokesman for General Motors Acceptance Corp. confirmed that the company was negotiating for a portfolio of assets from another LTCB affiliate. Japan's Nihon Kezai newspaper reported that the deal would involve buying about $8.6 billion of assets for about $1 billion. With GE, Merrill Lynch, Travelers Group, Fidelity Investments, and Japanese banks and brokers also cinching alliances, "the Japanese financial crisis may now be coming to an end," says Eisuke Sakakibara, Vice-Finance Minister for International Affairs.

The Japan Leasing deal dwarfs anything yet completed. When the company went bankrupt with $17 billion in liabilities, it was the biggest corporate failure in Japanese history. That triggered the nationalization of its primary lender and second-largest shareholder, Long-Term Credit Bank of Japan, a month later.

Along with control of LTCB, the government assumed the assets of Japan Leasing--which MOF officials wanted to unload as soon as possible. So GE Capital was able to force the government to swallow the firm's dud real estate loans. That leaves GE Capital with a portfolio of equipment-leasing and auto-fleet contracts carrying a $6.5 billion book value.

How much did GE Capital pay? The company won't say. But Nayden notes: "The Japanese government has been extremely flexible, cooperative, and receptive to new ways of thinking." Analysts such as Salomon Smith Barney's Jeffrey T. Sprague figure GE paid about $4.2 billion up front. The balance of $2.3 billion, 35% of book value, will be held in reserve. If the leasing portfolio is less sound than advertised, the company keeps the $2.3 billion.

WIDE MARKET. Overnight, GE Capital will become Japan's No. 3 leasing concern and get access to some 70,000 corporate clients of Japan Leasing. That could come in handy. Last year, GE Capital pumped $575 million into a joint venture with Toho Mutual Life Insurance Co. It could easily cross-market corporate life insurance plans to these clients. GE Capital could also expand into corporate lending.

GE Capital further hopes to carve out a big share of Japan's $42 billion consumer-finance market. It has acquired Koei Credit Co. and Lake Corp., both of which specialize in lending to individual borrowers who don't qualify for bank loans, at average interest rates of 26%.

Rivals aren't going to cede ground easily. In December, trading company Mitsubishi Corp. abruptly cut off talks for a leasing tie-up with GE Capital once it heard the American firm was talking to Japan Leasing. What's more, ING Groep, Metropolitan Life, and Deutsche Bank are bidding for Aoba Life, which inherited the policies of failed Nissan Insurance.

Having a world-class competitor throw its heft around may well scare the daylights out of Japanese rivals. But maybe that's just the jolt Japan needs to get its economy back in working order.

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