Goldman Swaps Aiful Loan for 8% Bond Luring Funds: Japan Credit

Goldman Sachs Group Inc. is set to get bonds with more than double the interest rate local Japanese banks will receive on loans when Aiful Corp. refinances.

The consumer lender, which postponed repayments to avoid bankruptcy in 2009, said June 13 it will exchange part of 161.7 billion yen ($1.6 billion) of debt for notes bearing an 8 percent coupon. While that’s in line with U.S. notes with similar credit scores, it’s among the highest for Japanese bonds in the past 15 years, data compiled by Bloomberg and Bank of America Merrill Lynch show. Domestic banks will extend new loans at about 3 percent, a person familiar with the matter said.

Local banks are accepting lower interest because they have collateral on loans to Aiful, while the debentures won’t be secured. The consumer lender is seeking to refinance for a second time in five years as Bank of Japan stimulus lowers funding costs and the burden of refunding customers for excess interest-rate charges declines.

“A coupon of 8 percent looks very attractive,” said Taketoshi Tsuchiya, a senior executive at Mizuho Securities Co. who heads a team dealing with distressed fixed income. “We’ve had a number of requests from overseas hedge funds saying they’d like to buy the bonds if they come on the market.”

Informal Agreement

Goldman Sachs and Aiful have reached an informal agreement that the U.S. bank will apply to swap loans for notes, according to two people familiar with the matter, who asked not to be identified because the details are private. Aiful triggered Japan’s first auction to determine the payout of credit-default swaps when it obtained lender approval to postpone repayment on 280 billion yen in 2009.

Japanese banks may be avoiding the risk of default by extending loans with collateral, according to Junichi Shimizu, a Tokyo-based credit analyst at Deutsche Bank AG.

“While the principal on loans gradually decreases as payments are made, corporate bonds are repaid at one go, so there’s the risk of a default depending on the business environment,” Shimizu said.

Only one yen bond offered by bankrupt Takefuji Corp. had a higher coupon in the past 15 years than the Aiful notes to be issued to Goldman, according to data compiled by Bloomberg. Takefuji’s securities issued overseas in 2009 paid 10 percent.

Debt Repayment

Aiful will obtain a loan from Japanese banks of a little under 80 billion yen with which it will repay part of its outstanding debts, according to a person familiar with the matter. Foreign creditors including Goldman Sachs will exchange more than 30 billion yen in liabilities for the new bonds due at the end of April 2020, according to the person.

Aiful will also postpone repayment of 52.7 billion yen of existing loans, it said in a statement on June 13.

“In difficult negotiations, we were compelled to accept tough terms on the bonds,” said Kenichi Hashimoto, an Aiful spokesman. “Realistically, there’s not such a big difference between the rate and that being charged in secondary markets.”

The extra yield on Aiful’s 1.99 percent bonds due in October 2015 was 7.4 percentage points over sovereign notes, according to data compiled by Bloomberg. The Tokyo-based lender is graded CCC+ by Japan’s Rating & Investment Information Inc., or the equivalent of seven steps below investment level.

U.S. corporate bonds with CCC or lower ratings had an average yield of 8.8 percent, while it was 9.2 percent for global notes with such scores, according to Bank of America Merrill Lynch data.

BOJ Stimulus

Borrowing costs have fallen in Japan as the BOJ buys about 7 trillion yen of sovereign bonds a month to spur inflation. The benchmark 10-year debt yield has dropped 15 1/2 basis points, or 0.155 percentage point, to 0.58 percent this year. The yen has gained 3.3 percent in 2014 to 101.93 per dollar as of 5:06 p.m. in Tokyo, after tumbling 18 percent last year.

An investment unit of Goldman Sachs held 14.5 billion yen of Aiful’s debt, while a unit of Barclays Plc had 9.4 billion yen at the end of March, according to material provided by Aiful to shareholders. The company’s single largest creditor was the banking unit of Sumitomo Mitsui Trust Holdings Inc., the documentation showed.

Hiroko Matsumoto, a spokeswoman for Goldman Sachs in Tokyo, declined to comment on the plan, as did Kyota Narimatsu, a spokesman at Barclays in Japan, and Hiroshi Kashimoto at Sumitomo Mitsui Trust.

Credit Event

Aiful’s December 2009 agreement with creditors to delay debt repayment resulted in a dispute over whether the action had caused a so-called restructuring credit event. Buyers of Aiful credit-default swaps, which insure bondholders against nonpayment, had to wait three months for the International Swaps & Derivatives Association to rule that the plan had triggered payouts.

Sellers of credit-default protection agreed in 2010 to pay holders 66.125 yen for each 100 yen of insured debt, in Japan’s first credit default auction, according to bid administrators at the time.

Aiful racked up 636.1 billion yen in net losses in the eight years ended March 31 as a crackdown on coercive lending practices and court rulings forced Japan’s consumer lenders to repay billions of dollars in overcharged interest.

That regulatory action led to the bankruptcy of Takefuji with 433.6 billion yen of liabilities.

Aiful recorded a profit of 30.5 billion yen in the 12 months ended March 31, its biggest in eight years and the third in succession. Interest repayments fell for a fourth year last fiscal year, dropping 57 percent to 33.1 billion yen from three years earlier.

“As the business environment is improving, banks can increase their recovery rate by continuing to support Aiful and its turnaround,” said Shintaro Niimura, a credit analyst at Nomura Securities Co., Japan’s largest brokerage. “For investors rationally seeking a profit, they’re emphasizing better repayment terms.”

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