Monday, November 29, 1999

ANALYSIS - Japan consumer lenders - and then there were 2?

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Japan's battered consumer lending industry is headed for another shake-out of which only two of the four major lenders -- Acom Co and Promise Co -- may survive.The country's once-mighty moneylenders, which offer unsecured loans to individuals and small firms, have been slashing assets and costs to cope with a cut in rates they can charge as well as claims for reimbursement for past interest stemming from an unfavourable court ruling in 2006.A set of regulations which go into effect Friday will cement the interest rate ceiling at 20 percent, down from 29.2 percent, and limit the amount an individual can borrow, in a fresh blow to an industry some warn could even face extinction in a few years.The dour outlook will place an even greater premium on a moneylender's ability to raise funds, which spells trouble for Takefuji and Aiful , the two major consumer lenders without capital ties with a bank, analysts said.Consumer lender loans graphic: losses graphic: Starmine Comparative data click:"The only survivors in the long term will be bank affiliates," said Junichi Shimizu, a Deutsche Securities credit analyst in Tokyo. "Sometime in the future a company might need more capital, so the relationship with a bank group is very important."Shimizu estimates that the top four consumer lenders will reduce their loan balances by 1 trillion yen combined in the current financial year to March 2011, after a decrease of roughly the same amount last year to 3.9 trillion yen.The credit contraction has been most pronounced at Takefuji and Aiful, which have slashed loans by 30 percent, leaving them with a dwindling revenue stream from which they can meet claims to reimburse overcharged interest.Takefuji, whose credit ratings have been cut deep into "junk" territory, is approving less than 10 percent of new loan applicants and in the latest quarter, its outlays for interest claims exceed sales.Shares of Takefuji shot up on Thursday on news it had sold enough assets to secure the 41 billion yen needed for an early redemption of convertible bonds, but some analysts are doubtful it can cover 53 billion yen in straight bonds due in April 2011."It could be very difficult to get refinancing for bonds next year," said Takehiro Tsuda, director of financial and real estate fundamental analysis at Citigroup Global Markets Japan, warning the industry as a whole may disappear in a few years.A Takefuji spokeswoman said the company is making various efforts to secure funding.MATTER OF TIMEThe tough conditions have already claimed several victims. Credia became the first listed consumer finance firm to fold in 2007 while SFCG Co, a lender to small companies, failed in 2009 with more than $3 billion in debts.Late last year, Aiful staved off bankruptcy by convincing its creditors to defer about 280 billion yen in bank loan principal payments, using a debt rescheduling procedure called "alternative dispute resolution", or ADR.The ADR agreement did not cover bonds, however. According to spokesman Hirofumi Haruguchi, Aiful's outstanding bond balance currently stands at 238 billion yen, the bulk of which will come due in the next two years.Haruguchi said the company is confident it can redeem those bonds through revenue from interest and principal payments."The pressure to repay bonds is still there," said Naoki Morimura, an analyst at Moody's, which rates Aiful's debt the speculative grade of Caa1. "Their operations simply cannot be viewed in the same light as bank-affiliated lenders."Among the regulations coming into effect on Friday is one limiting the amount one person can borrow to a third of annual income, a threshold the country's regulator estimates could affect 42 percent of borrowers, or about 9.6 million people.But the biggest threat to the industry remains charges to repay interest above the new ceiling of 20 percent.There is a booming industry for lawyers helping indebted borrowers seek repayment, and it is hard to predict when claims will peter out. Nomura Securities estimates the top 4 lenders could face 1.6 trillion yen in future repayment losses.SHARES FALLShares of all four lenders fell sharply on Friday due to worries over the impact of the new rules, as did Credit Saison and other credit card companies, which are better off than the pure moneylenders but will still take a hit.Iwao Iijima, head of the Japan Financial Services Association, an industry lobby, said earlier this week that consumer lenders would not likely recover until 2014 or 2015 and may not survive unless regulations are eased.The dire outlook also applies to Acom and Promise Co, even though they are seen as the most likely to weather the downturn due to bank support. Acom is owned 40 percent by Mitsubishi UFJ Financial Group and Promise 20 percent by Sumitomo Mitsui Financial Group.Both Acom and Promise are planning to bolster their overseas operations to secure growth. They face several hurdles, including limited finances to fund expansion with earnings under pressure in Japan.

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