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Japanese jitters - bank crisis - Banking: U.S.-Japan Relationships

CFO: Magazine for Senior Financial Executives, Oct, 1998 by Dun Gifford, Jr.

As the bank crisis filters down to U.S. units, investment-grade lending suffers.

As the three lead bankers for Starwood Hotels & Resorts Worldwide Inc. worked in January to line up multiple banks and $5.6 billion cash for Starwood's $14.6 billion acquisition of ITT Corp., they felt a chilly wind from across the Pacific. Although Bankers Trust, Chase Manhattan, and Lehman Bros. were still able to complete the deal, the final 46-bank syndicate lost seven Japanese institutions. They included Fuji, Sanwa, Sakura, Dai-Ichi Kangyo, and Tokai - all among the top 10 Japanese banks in America.

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Dealmakers certainly had anticipated some drop-off in participation because of Japan's banking crisis. Still, "1 don't think they expected the Japanese to pull back so sharply," says Jonathan D. Eilian, senior managing director of Greenwich, Connecticut-based Starwood Capital Group, which led the acquisition and financing of the ITT purchase. Indeed, overall Japanese funding dropped from about 40 percent to about 10 percent when the deal was completed.

"This was one of the reasons why we absolutely refused to increase the cash component of our offer for ITT," Eilian says, describing the bank market as not "deep enough to finance a highly leveraged bid." In the end, only two Japanese banks, in addition to the three largest ones in the United Stales, participated in the syndicate.

Titan Corp., a $330 million San Diego-based provider of information services to the military, felt similar cold gusts recently when it went to the capital markets to increase its lint' of credit from $35 million to $80 million. Titan CFO Eric DeMarco says that the company was turned down by "every Japanese bank that in previous years would have pounded the doors to lead or be part of the syndicate." To make matters worse, the lead bank in the original deal, Sumitomo of California, dropped out of the new credit. (Bank of Nova Scotia was eventually chosen.)

At first, Japanese banks expressed interest in participating, DeMarco recounts, but "once it went over to Japan for the ultimate blessing, word came back: 'No, not at this time.'" And they explained that "it's not you - it's us."

While for now it's still more of a distraction than a disaster, American companies that have relationships with Japanese bankers are finding they must make do with less financing from Japan - or work harder to keep funding levels where they once were. The U.S. branches of Japan's major banks, big loan-syndication players here until recently, increasingly have backed away from American business, especially lines of credit to investment-grade borrowers, term loans, and leasing, among other services.

Among the top 10 Japanese commercial lenders, total assets in the United States have shrunk 13 percent in the past two years, to $249.3 billion, with only Industrial Bank of Japan and Dai-Ichi Kangyo registering increases. At Long Term Credit Bank of Japan, U.S. assets have plunged by 25 percent and 35 percent, respectively, in the past two years (see chart, page 92).

For many blue-chip U.S. companies, this has meant a search for alternative funding sources, often at higher prices and with stricter terms.

BIGGER THAN THE S&L DEBACLE

It wasn't that long ago, of course, that Japanese banks thrived in the States. At their strongest, in 1992, the banks accounted for 18 percent of U.S. commercial loans. But today, Japanese participation is down to 14 percent and falling fast, according to research done for the Federal Reserve Bank of Boston by Joe Peek, an economics professor at Boston College, and Eric Rosengren, a Fed economist.

Many experts attribute the decline to the ability of Japanese banks to own equity securities under that country's laws, and to the years of profligate lending during Japan's "bubble economy." Banks in Japan get a boost to their capital levels when the Nikkei is strong, but must cut back on loans to stay in line with international capital requirements when the Nikkei heads south.

"Once the Nikkei collapsed, the banks' capital went through the floor," says Rama Seth, an economist at the New York Federal Reserve and author of a recent work on the effect of the Nikkei on Japanese lending in the United States. "Their U.S. presence was growing very rapidly before that, and you definitely saw a drop-off after the crash."

Because of the loose lending patterns of Japanese banks, the souring of that nation's economy has left them facing a crisis much worse than the downturn in the real-estate market that U.S. banks confronted in the early 1990s. As the Japanese write off bad loans, they gradually eroded the banks' equity cushions, leading to yet more cutbacks in assets to meet capital [TABULAR DATA OMITTED] requirements. (The estimated $600 billion total cost of the Japanese crisis so far exceeds even the roughly $480 billion price tag put on the savings-and-loan bailout of the 1980s.)

"The way we saw it was that the capital base of the Japanese banks was shrinking both from declines in the value of their equity portfolios and the write-downs of loans," says Starwood's Eilian. "And because their equity base was shrinking, they were forced to shrink their loan portfolios. For this reason, I don't think they would have changed their investment decision [in the ITT acquisition] even if the pricing were more attractive. Their cutbacks were driven less by price sensitivity and more by capacity sensitivity."

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Japanese jitters - bank crisis - Banking: U.S.-Japan Relationships

CFO: Magazine for Senior Financial Executives, Oct, 1998 by Dun Gifford, Jr.

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