Tokyo-based Shinsei Bank emerged from the remains of Japan’s Long Term Credit Bank in 2000, and divides its business into institutional banking, retail banking and consumer finance. The first of these units has been extremely profitable but an April credit note from Fitch Ratings says that "retail banking is just breaking even and [Shinsei’s] consumer lending businesses are suffering from the turmoil in that industry in the wake of legal changes that are enforcing radical industry restructuring."
Shinsei hopes to make a success of the deal by combining the retail and consumer finance businesses under one management structure. The bank says that it has mitigated the risks posed by potential losses arising from consumers seeking to reclaim excess interest payments, after Japanese authorities cut the maximum rate that such businesses were allowed charge by nine percentage points to 20%. Under an agreement with GE, Shinsei will be liable for the first ¥203 billion of potential losses arising from this "grey zone indemnity", with the two firms sharing losses above that up to ¥260 billion and GE taking sole responsibility for any further downside.
Full spectrum
"It’s always struck me that there’s a potential gap in the market in Japan," says David Marshall, head of financial institutions, Asia, at Fitch Ratings, "whereby the Japanese banks focus on very high end consumer lending and the consumer finance companies have catered to low-end customers and charged them rates of up to 30%. I think banks are starting to move down the credit spectrum as the consumer finance companies move up, and the industry could be very profitable for a firm that can offer a full range of services across that spectrum."
Shinsei could be that firm, says Marshall. In addition to the risks posed by the threat of indemnity losses, Shinsei will also have to monitor the credit quality of the portfolio it has acquired from GE but if it can successfully overcome these issues the bank stands to make good on the promise it has showed and raise profitability at a time when its larger peers are finding that task rather difficult despite their large capital reserves.
Deutsche Bank, meanwhile, has successfully arranged a ¥72 billion real estate-backed securitization of Shinsei’s headquarters, despite what might charitably be called difficult global conditions for the MBS market. The deal, which securitizes the financing of a Morgan-Stanley owned fund’s purchase of Shinsei Bank’s HQ, was bought by domestic institutional investors and used Deutsche’s long-running J-Core structure.
"The Japanese CMBS market is relatively stable at the moment," says Tokio Ueyama, director, commercial real estate, at Deutsche Bank, "because the majority of investors are institutional cash investors who buy and hold the product and don’t intend to trade or sell within the lifetime of the transaction. They tend to be cash-rich and are looking for paper with relatively high yields: right now the risk/return on offer in CMBS in Japan is quite attractive."
The trust certificates issued by Fujisawa Holding TMK, the special purpose vehicle established by the Morgan Stanley real estate fund, are divided into seven tranches rated from AAA down to BB+ and all pay floating interest based on the three-month Libor rate.