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AN EXIT PLAN FOR JAPAN?From Europe to Asia, the bundling of bad loans into marketable securities has slowed to a crawl. But Tokyo may be a ripe marketIt seems like an elegant solution: Japan's crippled banking system is saddled with $1 trillion-plus in dud loans. And Tokyo officialdom is about to embark on a very pricey public bailout: $510 billion. But what if the lion's share of problem loans could be bundled into marketable securitiesand sold off to global investors? Banks would finally unburDen their books of the stuff, replenishing their anemic capital bases. Then they could get into the business of lending again, ending a debilitating credit crunch that has pushed Japan into its most severe recession since World War II. That, at least, is the pitch from investment banks salivating over the prospect of picking up distressed real estate for a song, then pulling down big fees and profits by selling off asset-backed investments. For several years, J.P. Morgan, Goldman Sachs, and Bankers Trust have been prodding Japan to give it a try. After all, Japan will securitize more than $21 billion worth of healthier loans this year. That shows quite an appetite compared with last year's sales of less than $17 billion, according to Moody's Investors Service. ''The largest portion of securitizations comes from commercial loans to Japanese corporations. Those are performing loans and a lot of good loans,'' says Noel E. Kirnon, a managing director of Moody's in New York. But when it comes to Japan's distressed properties, no one seems to want to pick up the tab. ''We're not seeing a third party emerge that's confident in the underlying assets of these loans,'' adds Kirnon. ''NO HISTORY.'' The malaise pervades not only Japan but the rest of Asia and even Europe: Deals are few and far between. But Japan is clearly the biggest problem. Milton Ezrati, who is chief investment officer for Nomura Asset Management, thinks that if Japanese banks refashioned even a portion of their most troublesome commercial mortgages into salable securities, it would be enough to support a $100 billion market in Japan. It's an enticing vision. But the legal, tax, and cultural forces arrayed against a speedy sell-off of Japan's bad loans and their underlying collateral are considerable. Although the U.S. has had a mature securitization market for decades, ''there is just no history here like in the U.S.,'' says Ken Curtis, a managing director at Secured Capital Co. Successful Japanese deals involve prime properties. Long Term Credit Bank of Japan Ltd. and Nippon Credit Bank Ltd. sold most of their overseas loan portfolios to shore up capital-adequacy ratios. Foreign investment banks have been ready buyers. Goldman, Sachs & Co. raised eyebrows by bagging Meiji-era Yamato Seimei building in central Tokyo this summer and selling off the rental-income rights to global investors in a deal worth about $550 million. ''It's slow going, but it's moving forward,'' says Jack Rodman, a managing director for Asian real estate at E&Y Kenneth Leventhal in Los Angeles. ''There's no doubt that investors who are buying portfolios of nonperforming loans in Japan are looking to securitization as an exit strategy.'' But Rodman says bonds backed by commercial mortgages are at least a year away. Foreign investors in Japanese properties, he adds, are also waiting for the formation of real estate investment trusts (REITs) in Japan before bundling their properties for sale. ''The REIT market in Japan is progressing,'' he says. ''The people I am advising are planning to warehouse the better assets'' until that time. Yet repackaging low-risk assets such as credit cards, income streams from premier office towers, and loan portfolios to rock-solid foreign companies is one thing. Unloading Japan's most wretched commercial real estate mortgages, let alone, say, Indonesian corporate paper, is quite another. Property prices have fallen 80% since 1992. And some ill-advised real estate projects are yielding such meager flows of cash that it will be difficult to attract much interest. ''The quality of assets here is much worse than the U.S. experience'' with the thrifts, says Susumu Kato, an economist at Barclays Capital in Tokyo. Then there's the reluctance of many banks to sell their loans. There's the hope, however fanciful, that Japan's real estate market will come roaring back sometime down the road. Deals in the rest of Asia have halted because of reduced investor appetite. Says Michael Malter, a managing director and group head for global asset-backed securities at Chase Securities Inc.: ''[International business] has really dried up.'' In Europe, securitizations also have slowed to a crawl. Most major European banks have big loan-securitization programs planned or under way--Credit Suisse, Deutsche Bank, Dresdner Bank. Last year, total securitization issuance in Europe was $64 billion, with Britain and France leading. However, after a big first half in 1998, activity seems to be largely on hold. ''Markets are too turbulent to be selling much of this kind of stuff,'' says Stuart Graham, a J.P Morgan & Co. analyst in London. Other European banks seem to be holding back, too. There are those who believe this is just a temporary respite. But for now, investment bankers are frustrated because they figured they had found a safe approach by doing deals targeting overseas companies expecting payments in U.S. dollars. Last year, Citicorp Securities and ABN Amro Bank arranged a deal that enabled Pakistan Telecommunication to securitize $250 million in receivables from dollar-paying carriers such as AT&T, Sprint, and MCI WorldCom. Another appeal of these deals is that the arrangers and the issuing company often have other banking relationships, so there aren't many secrets between them, says Alvin G. Hageman, a managing director for global securitization at Citicorp Securities. ''At the end of the day, if you do this right, you have incredibly good assets,'' he says. But global liquidity meltdowns certainly don't help fuel growth in any part of the world. Could a bold and massive asset reshuffling of dud loans help Japan escape from its world-class banking mess? Sure. But the betting is that it will happen in Tokyo time--that is, glacially.
By Brian Bremner in Tokyo, with Thane Peterson in Frankfurt RELATED ITEMS
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Updated Oct. 15, 1998 by bwwebmaster
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