Japanese Bank Chief Calls for Caution in Financing Buyouts

The head of the Japanese central bank warned the country’s cash-rich commercial bankers today to be careful about financing highly leveraged corporate buyouts abroad.

“The decision to participate in LBOs should basically be made by each individual bank, but they have to be careful about the possible risks involved in such deals abroad,” Bank of Japan Gov. Satoshi Sumita said.

Some analysts say the reluctance of Japanese banks to participate in the leveraged buyout of UAL Corp., parent of United Airlines, helped trigger Friday’s plunge in Wall Street share prices.

A group consisting of UAL management, unions and British Airways wants to borrow billions of dollars to finance a $6.75-billion takeover of the No. 2 U.S. air carrier.

The original deal failed to win pledges of enough support from commercial bankers in Japan and abroad, and the group has been forced to come up with a new proposal.

Sumita told a press conference that Friday the 13th’s steep drop in New York stock prices was partly a reaction to precipitous price rises previously in shares of companies subject to leveraged buyouts.

He warned that LBO deals could run into difficulties in paying off the huge loans if interest rates rose and economic conditions worsened.