Policy Update 012

Assessment of IRCJ's Selection of First Group of Candidates for Rehabilitation

TSURU Kotaro
Senior Fellow, RIETI

On Aug. 28, the Industrial Revitalization Corp. of Japan (IRCJ) revealed a plan to help rebuild Dia Kensetsu Co., Kyushu Industrial Transportation Co., and Usui Department Store, the first batch of candidates to receive rehabilitation assistance from the state-backed agency. (Mitsui Mining Co. was added as another candidate on Sept. 1.) The announcement of the specific company names stirred little excitement as the general public, all in all, found them "far more modest" than they had expected. I also found the IRCJ's selection too weak in impact, falling short of becoming a catalyst to accelerate the sale of banks' nonperforming loans (NPLs) to the IRCJ.

Indeed, the IRCJ cannot afford to fail in the rehabilitation of those in the very first group, a crucial case which would affect the fate of its future operations. At the same time, however, it is also true that there had been strong speculation and expectation both within and outside the IRCJ that the first batch of companies be "major enough" to provide an opportunity for the IRCJ to show what it is capable of. As it turns out, however, the IRCJ, after thoroughly examining asset quality, decided on the companies perceived to have a clear prospect of revival so as to avoid secondary losses, which would ultimately be born by the taxpayer.

Designated to complete its tasks by the end of March 2005, the IRCJ has only a year and a half to buy up troubled loans from banks and other creditors; although banks are said to remain hesitant to seek assistance from the IRCJ. Unsure about the IRCJ's stance, banks are afraid that they may be forced by the IRCJ to waive more debts than they would otherwise. Also, banks are worried that they may be worse off in the distribution of final losses, that is, if their borrower fails to be rehabilitated even with the assistance of the IRCJ.

Judging from its decisions made hitherto, the IRCJ has yet to fulfill its intended public role. One of the important roles the IRCJ is expected to play is to give a push to an otherwise stalled corporate rehabilitation program by taking advantage of its capacity as a neutral public agency. Specifically, the IRCJ is to purchase and bundle together loans from a multiple number of creditors, thereby removing a major obstacle - conflict of interests between the main bank and other creditors - that has been hampering the rehabilitation of borrowers. The cases taken up this time, however, revealed that a delay in corporate rehabilitation can also be caused by the presence of a major public creditor - the Organization for Promoting Urban Development in the case of Kyushu Industrial Transportation, and the New Energy and Industrial Technology Development Organization (NEDO) in the case of Mitsui Mining - because public corporations stiffly resist yielding their claims. These cases involving public creditors would not have been solved if they were left to the self-help efforts of private-sector creditors. Thus, the IRCJ surely paved the way for the rehabilitation of these companies. At the same time, however, it left the impression that the planned rehabilitation is meant to be a scheme for one "public" entity to clean up the mess caused by another "public" entity. Also, with regard to Dia Kensetsu, the IRCJ is to help the government-recapitalized Resona Bank in a move tantamount to another case of "public-to-public" assistance. All these developments deviate from the originally-intended public mission of the IRCJ, which is to unravel the web of entangled interests of private-sector creditors. Candidates to receive support from the IRCJ should be limited, as a prerequisite, to companies which, in the event of failure, would have a substantial and extensive impact on the economy; as was the case with Daiei Inc. at a time when the government decided to apply tax breaks and other special measures to the retailer under the Industrial Revitalization Law. As it turned out, however, those selected as eligible for support from the IRCJ included companies with a strong local color, namely, Kyushu Industrial Transportation, a bus transit company in Kumamoto Prefecture, and Usui Department Store in Fukushima Prefecture.

Judging from how it operates, the IRCJ seems to be quite strongly motivated to "set a model" for the hitherto underdeveloped corporate restructuring market of Japan. During a news conference announcing the decision to support the first group of companies, for instance, an IRCJ official expressed the hope that the rehabilitation of Kyushu Industrial Transportation and Usui Department Store would become model cases for the revitalization of a bus operator and a local department store. This strong enthusiasm of the IRCJ, which has mobilized a number of professionals on corporate reconstruction, deserves appreciation. But it is questionable whether the IRCJ will be able to create the models it hopes to. Even if its revitalization schemes for the first group of companies prove to be successful, it may just be because of the peculiarity of the IRCJ as a public entity. Meanwhile, it would be inappropriate for the IRCJ to keep on providing support to one local company after another, be it a bus operator or a department store. It would be difficult to revitalize those within structurally depressed industries - realty and construction, local bus services, and department stores - solely by means of restructuring.

It is important for the IRCJ to come up with a new case, as soon as possible, that can present a successful model for the arbitration of conflicting interests among private-sector creditors so that banks clearly realize the benefits of turning in their troubled claims to the IRCJ. At the same time, it must be remembered that the ultimate success of this corporate revitalization hinges on the extent to which the IRCJ, bearing in mind the individual conditions and characteristics of each company it deals with, will be able to get involved in each of their efforts to develop new businesses.

This is a translation of the article published on the Japanese RIETI website on Sept. 5, 2003.

>> Original text in Japanese

September 5, 2003

September 5, 2003

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