Relationships Between Locally-oriented Corporate Reconstruction Funds and Local Financial Institutions

Author Name MATSUO Junsuke  (Professor, Faculty of Business Administration, St. Andrew's University)
Creation Date/NO. June 2006 06-J-045
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Corporate reconstruction by utilizing investment funds has been drawing a good deal of attention. In recent years, a number of locally-oriented funds targeted at the reconstruction of second-tier companies as well as small and medium-size enterprises (SMEs) in specific regions have been set up across Japan. Today, almost all prefectures have at least one such locally-oriented corporate reconstruction fund. A major characteristic of these funds is that they have been set up as part of local financial institutions' efforts to shift to relationship banking. The first half of this paper provides an overview of these funds currently operated in Japan, thereby confirming they have been set up and operated based on their close relationship with local financial institutions. Also presented is an examination of the current state of affairs - that the actual level of investments made by such funds remains low - using the results of a questionnaire. The latter half of the paper takes up debt-debt swaps (DDS) that have been drawing attention in recent years as a reorganization scheme based on the concept of relationship banking. Specific cases in which the scheme has been used are examined in order to consider the merits and challenges of DDS.

Through these analyses, the paper points out that both local financial institutions and troubled local enterprises have little incentive for quick and thorough business reconstruction and thus there is a strong tendency, both on the lender and borrower side, to hesitate to be made subject to transparent and drastic reorganization measures through the use of reconstruction funds. Then, based on these observations, the paper suggests that local financial institutions' initiatives in dealing with heavily indebted companies, particularly in urging borrower companies to take thorough restructuring measures, are quite important.

At the moment, few preceding studies on locally-oriented corporate reconstruction funds are available because such funds are relatively new and sufficient quantitative data have yet to be accumulated. This study attempts to sort out and illustrate the current state of locally-oriented corporate reconstruction funds by conducting interviews and questionnaires, and through case studies. The further accumulation of data will make it possible to empirically examine and verify this study's findings. This study provides some suggestions for conducting empirical research in the future on the relationships between local financial institutions' initiatives in promoting the restructuring of debtor companies and the actual level of investments made by locally-oriented corporate reconstruction funds.