In a First, Foreign Group Plans to Acquire Major Japanese Bank

A blue-chip international investment group plans to acquire debt-laden Long-Term Credit Bank of Japan Ltd. in what would be the first foreign acquisition of a major Japanese bank.

The deal disclosed Tuesday is a striking example of Japan’s increased willingness to open itself up to foreign investment. It also represents a step forward in the government’s efforts to clean up loan problems that have suffocated the banking industry since Japanese property prices collapsed in the early 1990s.

The Financial Reconstruction Commission said it had approved the deal, and that the investment group organized by private U.S. equity firm Ripplewood Holdings had signed a memorandum of understanding on the sale.

New York-based Ripplewood has specialized in buying struggling small to mid-size companies and making them profitable. It hopes to reach a final deal for Long-Term Credit by the end of November.

Other proposed investors in the new Long-Term Credit Bank include General Electric Co.’s GE Capital Corp., Mellon Bank Corp., ABN Amro Bank, PaineWebber Group and Deutsche Bank. Former U.S. Federal Reserve Chairman Paul Volcker is a senior advisor to the group.

Japanese companies such as Chuo Trust & Banking Co. and Mitsui Trust & Banking Co. had been in the running to acquire Long-Term Credit.

Long-Term Credit Bank, once one of Japan’s biggest banks, was nationalized in October after regulators determined it would never recover from a mountain of bad loans. It was the first time that the Japanese government had taken over a bank since World War II.

“We want to restore LTCB to its former status as a premier financial institution as quickly as possible, so it can contribute to the financial stability of Japan,” said the bank’s new chairman and chief executive, Masamoto Yashiro.

The Japanese government will inject $2.26 billion into the reformed bank on condition that the Ripplewood group continue loans to the bank’s troubled borrowers, according to a Financial Reconstruction Commission official who briefed reporters on condition of anonymity.

The new owners will acquire Long-Term Credit shares by paying $9.43 million to the Deposit Insurance Corp., the Japanese government finance body that is now the bank’s sole shareholder, the official said.

Yashiro, formerly a nonexecutive chairman of Citicorp Japan, said the new bank will try to expand its individual and corporate business. It will remain a Japanese-oriented bank in the initial years, Yashiro said.

He said eight of the 15 top board members are expected to be Japanese “because they would understand the Japanese market better.”

Timothy Collins, founder of Ripplewood, who will join the bank’s board, said he hoped to play a role in Japan’s economic recovery.

Collins said that although there are structural problems in Japan’s economy, he wanted to “find an area to restructure the Japanese economy and provide strategic advice.”

Analysts said the deal is likely to have a positive impact on Japan’s inefficient banking industry.

“Ripplewood will take it through restructuring you haven’t seen here, and there will be big pressure on others to follow suit,” said James Fiorillo, a banking analyst at ING Barings in Tokyo.

Financial Reconstruction Commission chief Hakuo Yanagisawa welcomed the deal. “Japanese financial institutions are far worse than Western counterparts in profitability,” he said. “New LTCB made it clear they will focus on fixing this problem. We hope this will become reality and affect [other Japanese financial institutions] positively.”

Long-Term Credit and the Ripplewood group hope to reach a final agreement by Nov. 30, and the government may extend the period if needed.

The Financial Reconstruction Commission, a government body overseeing banking industry reform, has been discussing Long-Term Credit’s transfer since the middle of this month.

The sale is likely to speed up the opening of Japan’s financial industry to foreign firms, a pillar of the country’s financial reforms.

“It shows the government’s commitment to creating a level playing field, and that it won’t even let nationalism get in the way of what needs to be done,” Fiorillo said.

Much of Long-Term Credit’s bad debt was the result of aggressive lending to real estate developers before property prices in Japan collapsed in the early 1990s.