Kumagai's Towering Losses

Few Japanese companies have suffered more from the U.S. real estate slump than Kumagai Gumi Co. Its mammoth, coral-granite Americas Tower on New York's Avenue of the Americas is 35% vacant. Almost all of the office space in its nearby hotel complex sits empty. And Kumagai's troubles are not limited to New York. A huge office tower in Seattle that cost $165 million to build is now worth about half that. One real estate consultant who worked on many of Kumagai's U.S. deals says, with only slight hyperbole: "Their asset value has totally disappeared."

With Kumagai's financial condition deteriorating rapidly, Sumitomo Bank Ltd. and Long-Term Credit Bank of Japan Ltd.--two of Japan's most powerful banks and Kumagai's biggest creditors--have installed officials in key posts at the giant contractor. The action is the latest indication that Japan's banks are moving aggressively to unload bad loans and properties acquired overseas by Japanese companies in the heyday of the 1980s "bubble economy." That means more Japanese companies will be swallowing big losses. "They'll be getting dimes on the dollar," says one New York consultant. And possible wholesale dumping of Japanese properties could be more bad news for the still depressed U.S. commercial real estate market.

BURST BUBBLE. Kumagai's new management faces a daunting task. Once a small contractor in a backwater on the Sea of Japan north of Osaka, Kumagai grew explosively in the 1960s and '70s. It did well until cheap money in the bubble days--much of it supplied by LTCB--lured it into a slew of major projects in Australia, Britain, and the U.S. With a staggering $6.3 billion in debt, Kumagai was clearly in over its head. "They started to cultivate overseas business as if managing overseas risk was as easy for them as managing risk in Japan," says Etsusuke Masuda, a construction analyst at Salomon Brothers Asia Ltd.

The U.S. real estate slump has made Kumagai an unwilling landlord, stuck with unsalable properties and unplanned-for debts. In New York, Kumagai has been forced to offer lower-than-expected rates to find tenants for its office buildings. While Kumagai has managed to lease 95% gf two buildings in the Los Angeles area, its AT&T Gateway Tower in Seattle is about half empty. The company won't provide figures but admits it has been losing money overseas for three years.

The bankers from Sumitomo and LTCB are busily trying to restructure Kumagai's operations. They will be pushing the company to raise cash quickly, and that means selling overseas properties at substantial losses. In return, the banks will likely provide Kumagai with some fresh loans or interest-rate concessions. To ease its cash problems, Kumagai has already sold off some of its best assets. Earlier this year, it got $85 million for most mf its stake in a highly successful affiliate, Kumagai Gumi (Hong Kong) Ltd.

"RALLY AROUND." And the intervention at Kumagai is likely to be a model for other banks as well. "Kumagai Gumi has grabbed the headlines because they are one of the largest, but they certainly aren't going to be the last ones to get help," says Graeme McDonald, an analyst at James Capel Pacific Ltd. Indeed, another troubled construction giant, Tobishima Corp., already has three bankers on board from Fuji Bank Ltd.

Yet while Dai-Ichi Kangyo Bank Ltd., Bank of Tokyo Ltd., and other Japanese lenders have begun foreclosing on real estate loans to U.S. companies, they won't be as harsh with Japanese borrowers. "Japanese investors expect banks to rally around and take care of a company," says Stewart Matthews, banking analyst for SBCI Securities (Asia) Ltd. And as Japanese banks move forcefully to cut their losses, a property sell-off should eventually help the U.S. market. Currently, loans are at much higher levels than the value of buildings. "In order for the office market to recover, the product has to be repriced," says James D. Kuhn, president of Newmark & Co., a New York real estate broker.

But over the near term, U.S. commercial real estate owners are very likely to find that financial problems at Kumagai and other Japanese property owners will turn into just another in a long series of headaches.

      AMERICAS TOWEROffice building, New York
      Hotel/office complex,
      New York
      Mixed-use complex, New York
      Indianapolis, Indiana
      Office building, Los Angeles
      Office building, Burbank, Calif.
      Office building, Seattle
      Puerto Rico
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