Japan's Ltcb: What A Coup And What A Risk
Ripplewood Holdings is scarcely a household name in the U.S.--let alone Japan. Since its 1995 launch by former Lazard Freres & Co. investment banker Timothy C. Collins, the New York buyout specialist private equity fund with $430 million under management has stuck to small quarry in the U.S., investing in everything from an English muffin maker to an Atlanta auto dealership and a children's magazine.
Now, Collins has decided to think big--really big. On Sept. 28, Ripplewood won the exclusive right to bid for busted Long-Term Credit Bank of Japan Ltd., currently owned by the Japanese government, for about $1.2 billion. If completed, the deal will be the first outright foreign takeover of a Japanese bank--a huge step in Tokyo's plans to import Western practices, in an effort to drag Japan's banking industry out of the financial dark ages.
But the move is fraught with risk for Ripplewood and a blue-ribbon consortium, including Citigroup, Mellon Bank, Deutsche Bank, and GE Capital. LTCB, with $90 billion in assets, is a giant locked in a dying franchise of lending to major Japanese companies, such as Toyota Motor Corp. and Tokyo Electric Power Corp., at razor-thin spreads. The long-term lender has no retail network, has suffered massive staff defections--particularly of investment bankers--and had $47 billion of bad debt when it was nationalized last October. Besides, its unseemly practice of steering bad loans into dummy affiliates did grave damage to its image.
All the same, Collins sees plenty of potential in LTCB's blue-chip client base and rates it "a premier asset with excellent business prospects." And he has tapped former Federal Reserve Board Chairman Paul A. Volcker as an adviser and former Citibank Japan Chairman Masamoto Yashiro as chief executive to refashion it into a retail and corporate finance powerhouse, offering everything from credit cards to exotic asset-backed securities. The new LTCB could also become a platform for selling profitable fee-based products such as mutual funds, merger advisory services, and corporate pension fund management. "We want to create a financial institution that hasn't existed in Japan," says Yashiro.
DEAD WEIGHT. But there is a catch. Ripplewood won't be allowed to boost profits by selling off existing LTCB loans or cutting off troubled borrowers until three years after the takeover is completed--unless, that is, Japan suffers a cataclysmic event such as a North Korean missile attack or a massive earthquake. Financial Reconstruction Minister Hakuo Yanagisawa and the ruling Liberal Democratic Party considered that condition a make-or-break issue in negotiations. Ripplewood "obviously had to make some concessions to pull this [deal] off," says James Fiorillo, a Tokyo-based banking analyst for ING Barings Securities Japan Ltd.
The trick will be for Yashiro and Collins to generate a revenue gusher from new activities--and enough new profits to offset the dead weight of LTCB's low-yielding loans. That's going to be tough. Just about every other money-center bank in Tokyo is looking to bolster its own profits by jumping into higher-margin mutual funds and pension fund management, too. The $1.2 trillion three-way alliance between Industrial Bank of Japan, Fuji Bank, and Dai-Ichi Kangyo, for example, won't let a foreign-backed LTCB waltz into such lucrative areas without a fight. "We will be very competitive," says Fuji President Yoshiro Yamamoto.
Yet LTCB, after it has been recapitalized, shouldn't be any slouch, either. The idea is for Ripplewood's group to pump in $1.14 billion of fresh capital, after paying about $10 million for LTCB shares. Meanwhile, it is negotiating for the Japanese government to kick in an additional $2.3 billion by buying preferred shares in LTCB, as well as to more than double LTCB's loan-loss reserves, to about $4.7 billion. Also, it has a preliminary agreement for the government to take over any existing loans whose book value should drop by 20% or more through 2003. Already, a break in accountancy rules allows LTCB to count about $2 billion worth of its shareholdings in other companies as capital. With that array of measures in place, the reconstituted bank should have capital available that amounts to about 13% of its loans. That's a respectable ratio, well above the 8% required under international regulatory rules and higher than the average 11.9% ratio of other Japanese money-center banks.
WAITING IT OUT. The Ripplewood group aims to relist LTCB's shares on the Tokyo Stock Exchange eventually. Provided Collins and his backers succeed in putting the solid new capital foundations in place, they could make money on the deal. It might, however, take the better part of a decade--the period the investors say they plan to hold their stakes. But they're likely to persevere, because the reputations of U.S. and European banking, as well as just profits, are riding on this deal.
After all, foreign banks have long dreamed of getting a crack at managing Japan's massive $12 trillion in household savings. With their superior risk-management techniques and fancy computer systems, they believe they can run rings around the local players. Well, Japan's long-running financial crisis has finally pried the door open. Now, it's time to put up or shut up.