What, me worry? For years, that seemed to be the motto for both investors and issuers in Japan's corporate bond market. Borrowers usually got upbeat reports from Japanese rating agencies. Few fretted much about defaults, since no major company's banks would foreclose if it had trouble making loan payments. If some borrowers sold bonds at rates that really didn't reflect the risk they posed, investors didn't mind. Corporates still offered some of the best returns in Japan.
These cozy arrangements all changed on Sept. 14, when Kozo Yamashita, then president of giant retailer Mycal Corp. (MYCAF
), bowed deeply before the TV cameras and politely told viewers that his company had collapsed under $8 billion in bank and bond debt. Mycal's biggest bank, Dai-Ichi Kangyo Bank Ltd., had foreclosed on its loans, signaling the end of a long era of complicity between Japan's lenders and companies. Now, bondholders will be lucky to get 10% of the par value of their $2.8 billion in Mycal notes. The scary thing was that they had no inkling of a collapse.
The Mycal bond default--the biggest ever in Japan--has put the nation's corporate bond market in the spotlight. Now that investors realize how shaky and poorly managed it is, there's little appetite for new issues. While no one will own up to cancelling an issue, experts say the Mycal shock will drive new-issue volume down as much as 10% this year from last year's $65 billion. Next year, who knows? The yield on some lower-rated debt has nearly doubled, to 2.4%--100 basis points over the 10-year Japanese government bond (JGB). Merrill Lynch & Co.'s Japan Corporate Index shows that on average the premium corporate borrowers pay over JGBs widened by 18.7% from Sept. 14 to Oct. 8.
The drying up of the bond market is important because bonds are one of the last remaining sources of fresh cash for Japanese companies. Banks are too weak to lend and stock markets are in free fall. Now, borrowers and their ratings will get far closer scrutiny. "The Mycal case is a warning to every creditor and bond investor," says Akio Mikuni, president of credit-rating agency Mikuni & Co. He says that two-thirds of the 1,600-odd Japanese companies and banks his firm rates are BBB--the lowest investment-grade rating--or below, while 107 are CCC, a red flag that a company is close to default.
MISSED CLUE. With many Japanese companies struggling to stay afloat, the shriveling of the corporate bond market couldn't come at a worse time. Particularly hard hit will be retail and construction companies, the most profligate local borrowers. These companies depend exclusively on the domestic economy and, unlike Toyota (TM
), Sony (SNE
), or NTT (NTDMY
), can't tap international capital markets.
The mystery is why local investors didn't dump the Mycal paper a long time ago. One reason is that the Japan Credit Rating Agency (JCR) kept Mycal's triple-B rating until August, though its debt payments were staggering. Standard & Poor's Corp., however, downgraded Mycal to BB a year ago and again to B before it failed. Yet Japanese investors missed the clue. Mycal posted a net group loss of $721 million in the fiscal year ended March, 2001. When asset sales didn't pan out, Mycal's debt overwhelmed it.
Why was JCR so lenient? Critics point out that JCR is owned by a consortium of Japanese banks (Dai-Ichi Kangyo among them) and insurers with stock and bond holdings in many of the companies it rates. Liberal ratings have helped banks justify liberal treatment of dodgy bank loans. That allowed banks to avoid jacking up their loan loss reserves. Hence, Mycal was on a watch list, but not deemed a total deadbeat. JCR justifies its rating and denies any undue pressure from the consortium. Not only had Mycal met its payments, the retailer "said [it] would be able to maintain a stable relationship with the main bank," a JCR spokesman said.
Another conflict of interest: Japan's top banks often serve as corporate bond trustees for companies they lend to. The trustee's job is to liquidate bankrupt companies to repay bondholders. But, skeptics say, the banks are likely to recover their loans first and worry about bondholders later. Bondholders, beware. Getting money from Japan's failing companies may prove hopeless.
Corrections and Clarifications
"A bond market headed for the junk heap?" (International Business, Oct. 22) erred in saying Dai Ichi Kangyo Bank Ltd. is a shareholder of the Japan Credit Rating Agency, which does not follow the bank. Also, Standard & Poor's downgraded its rating of Mycal Corp. starting in 1997, not last year.
By Brian Bremner in Tokyo
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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