International Business: Banking
Japan's LTCB: What a Coup--and What a Risk
Can a U.S. equity fund turn the busted bank into a moneymaker?
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 and 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, he 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 would be the first outright foreign takeover of a Japanese bank and a huge step in Tokyo's plans 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 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, and had $47 billion of bad debt when it was nationalized last October.BIG CATCH. Still, Collins sees potential in its client base and rates LTCB as "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 fee-based products such as mutual funds and corporate pension management. "We want to create a financial institution that hasn't existed in Japan," says Yashiro.
But there's a catch: Ripplewood won't be able to boost profits by selling off existing LTCB loans or cutting off troubled borrowers until three years after the takeover is completed, unless Japan suffers a cataclysmic event such as a North Korean missile attack or massive earthquake. Financial Reconstruction Minister Hakuo Yanagisawa and the ruling Liberal Democratic Party considered that issue a deal-breaker. 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 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 jumping into 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 recapitalized, LTCB should not be any slouch either. Ripplewood's group will pump in $1.14 billion of fresh capital. It is negotiating for Tokyo to kick in $2.3 billion more by buying preferred shares in LTCB and 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 drops 20% or more through 2003. Already, LTCB is allowed to count about $2 billion worth of its shareholdings in other companies as capital. With those measures in place, it would have capital equivalent to about 13% of its loans. That's well above the 8% required under global rules and higher than the average 11.9% of other big Japanese banks.
Provided Collins and his backers can put such solid foundations in place, they could make money--though it might take the better part of a decade, the period that the investors say they plan to hold their stakes. But reputations, as well as profits, are riding on this deal.
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.By Brian Bremner in Tokyo