Condo Developer Azel Files for Bankruptcy Protection

Azel Corp. said it has decided to file for bankruptcy protection with debts totaling 44.2 billion yen.

The Tokyo-based mid-sized condominium developer has had increasing difficulty meeting its funding needs as well as clearing inventories.

We have seen dozens of condominium developers and real estate fund operators file for bankruptcy since late last year.

However, thsi year we have heard that Middle Eastern and other Asian investors are showing interest in buying real estate owned by these bankrupt companies.

Mitsubishi UFJ Lease Sets Up Principal Investment Sub

Mitsubishi UFJ Lease & Finance announced that it has established MUL Principal Investment Co. as its 100% subsidiary. MULPI will make direct investments in MBOs, turnarounds, successions and other buyout opportunities focusing on Japan's middle market. Typical investment sizes will be between JPY 3-5 billion (USD 30-50 million) and the initial investment budget is reportedly JPY 30 billion (USD 300 million).

In the past, Mitsubishi UFJ Lease invested in international and domestic private equity funds as a limited partner. While it has also provided LBO loans to domestic buyout deals, the establishment of MULPI is a distinct new step in the leasing company's private equity history.

Hokuetsu Paper To Buy Kishu Paper

Hokuestu paper, the 7th largest papermaker in Japan, announced that they will take full control of Kishu Paper, the 10th largest papermaker through an equity swap.

Hokuetsu was once the target for Oji paper’s hostile takeover bid. At that time, Hokuetsu obtained support from other corporations and was able to avoid being taken over by Oji.

The paper industry is one of many industries which are in need of re-organization. Many paper companies exist and have a difficult time competing both domestically and abroad with Asian rivals, which use cheap labor.

I hope this M&A prompts the industry to reorganize, otherwise all players in the Japanese paper industry will sink together.

BOJ Bought JPY 1 Billion Shares From Mizuho CB

The Bank of Japan announced the resumption of its emergency measure to buy up to 1 trillion yen of shares owned by banks by April 2010. It aims to boost the banks’ capital amid global share prices plunging.

Mizuho Corporate Bank is the first bank to take advantage of this program while other banks are apparently reluctant to unload their shares and finalize losses before the end of the current fiscal year.

More than one month has passed since BOJ announced this measure. No banks have applied yet. We expect more banks to apply after the start of the new financial year.

Mitsubishi UFJ, Morgan Stanley To Form Securities Joint Venture in Japan

Mitsubishi UFJ Financial Group, Inc. and Morgan Stanley announced todaythat they have signed a memorandum of understanding to form a securities joint venture combining Mitsubishi UFJ Securities Co., Ltd. and Morgan Stanley Japan Securities Co., Ltd.

MUFG will own a 60% stake while Morgan Stanley will own a 40% stake. The joint venture will be named at a future date. Morgan Stanley will appoint the joint venture’s chairman while MUFG will designate the new company's President and CEO.

MUFG also will name the Deputy President and CEO of the joint venture’s retail and middle markets business. Morgan Stanley will appoint the Deputy President and CEO of the institutional securities business.
(From MUFG press release 3/26/09)

Will they still bid for Nikko Cordial? If so, this joint venture will become as competitive as Nomura Securities with Nikko Cordial.

TSE to Launch CDS Clearing Services

Tokyo Stock Exchange Inc. announced that it will start clearing services for credit default swaps in 2010 through its subsidiary Japan Securities Clearing Corp. TSE will boost its efforts to expand derivative related businesses to overcome a prolonged stock market slump.

Daiwa SMBC Capital to Sell Mazda Car Rental

Daiwa SMBC Capital has agreed to sell Mazda Car Rental Corp. to Park 24 Co. (TSE 4666). Daiwa SMBC Capital, the VC investment arm of Daiwa SMBC group, has several buyout investments in their VC portfolio and acquired Mazda Car Rental in September 2004 with co-investor Sumitomo Mitsui Auto Service from Mazda Motor Corp.

Park 24, a major parking lot operator, will invest JPY 2.07 billion (USD 21 million) to acquire a 98.6% stake in Mazda Car Rental. The company plans to offer car-sharing services through its 8,600 parking lots.

Daiwa SMBC Principal Investment to Form Asia-Focused Fund with Ex-Sony Chairman

Daiwa Securities SMBC Principal Investment Co. Ltd and Quantum Leaps Corporation headed by ex-Sony chairman Nobuyuki Idei, announced that they have agreed to establish a joint venture, Daiwa Quantum Capital Limited ("DQCL"). DQCL will manage Daiwa Quantum Capital Partners I ("DQCP I"), an Asia-Japan focused private equity fund to be launched in April.

30% of the fund will be invested in Japan, while the remaining 70% will be allocated to non-Japan Asia including China and India. DQCP I will seek investments from both domestic and overseas institutional investors. Daiwa SMBC PI will commit to approximately 30% of the total fund.

According to the SMBC PI's news release, DQCP I "will invest in technology oriented companies with high growth potential and support their growth by providing risk capital. It will act as a bridge between Asia and Japan, with an investment focus on providing support for Asian companies to grow by acquiring technologies and management skills from Japan and also for Japanese companies to expand their business in Asia."

Sluggish Sales but Only Green Consumers Active

The Japanese Department Stores Association announced last week that sales at all department stores are down 11.5% compared to sales during the same month last year. The last time double-digit negative growth was recorded was 11 years ago. The Japan Chain Stores Association announced Monday that Feb. supermarket sales were down 5.4%, continuing in to the third straight month of decline.

On the other hand, green products have remained healthy. Insight, the new Honda hybrid, has been selling hot off the shelf since its launch. The number of installed solar-power systems are estimated to jump 61% to 92,000 in 2009, and then expand to nearly 150,000 in 2010 according to Sharp Co., a major solar panel manufacturer.

Tough Times for Securities House Principal Investment

Merril Lynch Japan closed its principal investment division this Feburay. The division has not made any investments in the last 3 years, a smart decision given recent events.

Nomura Principal has been very busy revitalizing not only Skylark (a restaurant chain) but also Ashikaga Bank (one of the largest regional banks). Nomura Principal made a large investments in both companies. Currently, Nomura Holding has suspended new principal investments. Regarding Nikko Principal, Nomura has missed the exits for portfolio companies like Bell System 24 in the last year.

Since companies demand money that banks are reluctant to lend, those companies often turn to securities principal firms next. Securities firms may have money to invest, but they have been kept very busy taking caring of battered portfolio companies.

Goldman Sachs has either taken a great leap of faith toward USJ or had their hand forced because they did not have enough shares to control the company.

Auction for Nikko Cordial Up in April

Citigroup plans to hold a second auction for Nikko Cordial Securities in April.
At the first auction, held in Feburary, 3 mega banks, Mitsubishi, Sumitomo and Mizuho made bids. Citi has begun working on the financial data and is providing more detailed information as requested.
The 3 mega banks all believe that they are not in desperate straits but are unwilling to let the bid go to a rival.
The estimated cost for Citigroup is around 300 billion yen($3bill) but may increase.

GS, MBK. Owl Creek: Management Buyout for USJ

SG Investment Co., an investment firm of Goldman Sachs Group makes a tender offer bid for USJ Co, the operator of the Universal Studios Japan theme park in Osaka. Goldman Sachs holds 41% of USJ shares through its subsidiary Craine Holdings Ltd.

They aim to acquire all shares at 50,000 yen (today's shares closed at 40,700 yen) with MBK Group, the ex-Carlyle PE firm Owl Creek Investment, and Glen Gumpel, President and CEO of USJ Co., Ltd.. It will cost around 111 billion yen, max. They plan to receive financing from the Bank of Tokyo - Mitsubishi UFJ, Mizuho Corporate Bank, Nomura Capital Investment, The Sumitomo Trust & Banking, GE Financial Service, Calyon Bank and the Chuo Mitsui Trust & Banking for a maximum of 75 billion yen.

SG Investment will delist USJ and take it public again after strengthening its business.

It has been a long time since we've seen a MBO of more than 100 billion yen. The last large MBO was when Advantage Partners bought Tokyo Star Bank at the end of December 07.

BOJ; Buying Bank Sub Debts

The Bank of Japan announced that it plans to purchase subordinated debts issued by Japanese major banks up to JPY 1 trillion .

With the deterioration of real economy and plunging Nikkei stock prices, the balance sheets of Japanese banks are under pressure. Through the purchase of sub debts, BOJ will help enforce bank capital so that banks can continue to lend money to Japanese corporations.

Some say this action shows BOJ's determination to support the financial system, others say JPY 1 trillion is not enough.

iSigma Capital; Restaurant Chain Under Control

iSigma Capital, a middle-market buyout firm and a 100 % subsidiary of Marubeni Corporation, has purchased all outstanding shares of SweetStlye from G-Communication, a Nagoya-based holding company of restaurant chains.Sweet Style specializes in confectionary, bakery and coffee shop business. According to the press release dated 12 March 2009, iSigma expects to contribute to the further growth of SweetStyle using its value-up expertise and capitalizing on Marubeni's broad business network. Marubeni is one of the largest trading companies in Japan and it seeded Advantage Partners in their earlier funds.

Carlyle；Additional Y5bn into PHS Operator Willcom

The Carlyle Group LLC will inject 5 billion yen next month into PHS Operator, Willcom. The US firm acquired Willcom (previously DDI Pocket Inc.) alongside with Kyocera Corp. and KDDI Corp. for 220 billion yen in 2004. Willcom says it needs 140 billion yen to build infrastructure for its next-generation PHS. The service will have transmission speeds more than 20 times as fast as current offerings. Nikkei Newspaper reported that the add-on investment was a very tough decision for Carlyle, but it is expected to have a positive influence on Willcom’s 100 billion yen refinancing negotiation with Japanese banks.

FSA; Increasing Oversight of REITs and Securities Firms

Following the bankruptcy filing by Pacific Holdings Inc. (8902) this Tuesday, which oversees two listed REITs, the Financial Services Agency (FSA) will increase monitoring of real estate investment trusts (REIT). REITs are structured such that they are guarded from the bankruptcy of the sponsor, but the bankrupt sponsor will not be able to arrange any liquidity to the REITs. FSA is concerned that a failing REIT can have a strong influence over the broader market.

The FSA will also assume more responsibility from next month in the inspection of large securities companies. Currently, the Securities and Exchange Surveillance Commission (SEC) inspects large brokerages. Securities firms used to rely on the trading commissions. However, they have become increasingly dependent on the investing and financing business using their own balance sheet. This has raised concerns of the watchdog, given the impact that the collapse of US investment banks had to the current global crisis. The Diet is currently reviewing legislation that will enable injection of public funds into brokerage firms.

Government to Inject USD 1.1 Billion to 3 Regional Banks

The Japanese Government is to inject 121 billion yen to 3 regional banks.

Following the legislation to recapitalize regional banks, Sapporo Hokuyo Holdings Inc., Minami-Nippon Bank and Fukuho Bank are seeking 100 billion yen, 15 billion yen and 6 billion yen, respectively. Approval by the Financial Services Agency is expected this week.

Sompo Japan, Nipponkoa Insurance To Merge In Spring '10

Sompo Japan Insurance Inc. and Nipponkoa Insurance Co will merge by spring 2010 under a holding company set up by Sompo Japan. Sompo Japan is currently the third largest casualty insurance company while Nipponkoa Insurance Co is the fifth largest insurance company. The new company will become the third largest casualty insurance group in Japan, following the Mistui Sumitomo, Aioi Insurance and Nissay Dowa Insurance Merger and Tokio Marine Holdings Inc. In 2000, deregulation of insurance premiums triggered a large-scale reorganization and resulted in a consolidation to six major players. By April of 2010, analysts expect there to be only three major players: Mitsui Sumitomo, Aioi and Nissay Dowa’s new company, and Sompo Japan and Nipponkoa’s new company. A shrinking domestic casualty insurance market may have motivated the mergers. Slow new-car sales and an aging population have deterred purchases of auto insurance policies.

U.S. Fund TPG To Sell Remaining NIS Stake To Index Holdings

NIS Group Co. (8571) has announced that major shareholder TPG, a U.S. investment fund, will sell most of its remaining stake to Index Holdings (4835) by the end of March.

TPG drew down its interest to 8.3% from 40% last December. Index will purchase 7.93% of NIS, becoming the fifth largest shareholder.

Pacific Holdings Files For Bankruptcy With Y163bn In Liabilities

Pacific Holdings Inc. has filed for bankruptcy protection after a deal with Chinese investors collapsed when the investors discovered that the company had capital deficit of JPY 5.3 billion. The failure is ranked as the fourth largest in the 2008 fiscal year. With 163.6 billion yen in liabilities, the real estate company’s 37 billion yen’s worth of bonds will go into default. Although this bond default is the largest since 2001, analysts say the impact on the bond market will be minor. The company will transfer equity interests of Nippon Residential Investment Corp. and Nippon Commercial Investment Corp to a new sponsor.

The Tokyo Stock Exchange announced that Pacific Holdings shares will be placed on the liquidation post Wednesday, with the company to be delisted April 11.

Govt To Guarantee Principal On Inflation-Linked JGBs

The Ministry of Finance plans to guarantee the principal on inflation-indexed Japanese government bonds (JGB). By guaranteeing the principal, the ministry hopes that investors will turn to these safer bonds despite their lower interest rates in times of deflation. Recently overseas buyers, the main investors of inflation-indexed JGBs, have been selling their holdings to secure cash during the financial crisis. Plunging inflation risks have only exacerbated this, causing even weaker demand. The ministry does not plan to issue any new inflation-indexed JGBs during the first half of fiscal 2009 while it researches how to make these bonds more attractive to investors.

Corporate Bankruptcies Up 10% In Feb; Liabilities Climb To Y1.22tln

Bankruptcies have increased for the 9th straight month. Corporate failures rose 10% in February and liabilities increased 230% to 1.22 trillion yen. Seven listed companies have failed, the highest since October 2008.

Failed companies include SFCG and Japan General Estate Co. The construction industry had an 8% increase in failures, real estate had a 51% increase, manufacturers had 36% increase, and wholesalers had an 11% increase.

The government’s October 2008 loan guarantee program played a role in ameliorating bankruptcies among small and midsize businesses that had between JPY 5-10 million in capital. On the other hand corporate failures with capitalizations of JPY 10-50 million increased by 12%.

Total bankruptcies this year are numbered around 14,600 companies, making 2008 perhaps the highest in six years.

French National Pension Fund To Invest Y110bn In Japan Stocks

The French National Pension Fund will invest JPY 110 billion (EUR 900 million) into Japanese stocks this year. Daiwa SB Investment, DIAM, Co, and Fidelity Investments Japan will manage the investment through four-year contracts. The investment will represent about 3% of the pension fund's total assets.

The pension fund is interested specifically in Japanese blue chips as they consider them undervalued and more stable than other stocks.