CNA – Japan’s financial regulator is exploring ways to bolster financing for leveraged buyouts (LBOs) and is in discussions with big banks and other institutions about how to bring more participants into the market, regulatory officials said.
As more corporations step up sales of non-core assets or seek buyers due to succession issues, Japan’s regulators have grown worried that the LBO finance market, concentrated among a few large banks, is not mature or diverse enough to deal with the rising risks and demands.
“We are studying what we could do to have more participants in the LBO market while ensuring that risks are properly controlled,” deputy director-general at the FSA Toshinori Yashiki said in an interview.
“We hope to have a framework that helps prevent risks of leveraged financing being excessively concentrated in certain banks,” he added, citing the development of a secondary market among possible options.
That marks a more proactive stance by regulators towards LBOs.
Japan has yet to develop a secondary market for leveraged loans similar to that in the United States, and arrangers of large buyout debt deals are typically limited to big, deep-pocketed commercial banks that hold the bulk of them on their balance sheets.
The limited universe of players means a concentration of risk, which stirred concern among regulators when Marelli Holdings Co, an auto parts supplier bought by KKR & Co in a leveraged deal, requested a massive debt waiver and generated losses for some top banks last year.
Outstanding LBO loans held by major Japanese banks doubled in five years to about JPY4.5 trillion (USD32.32 billion), according to FSA data for the year to March 2022.
As an initial step, the FSA office that monitors major banks has initiated a dialogue with large banks and other financial institutions such as insurers, an FSA official in charge of the dialogue said in a separate interview.
“We know there is no easy solution,” said the official, who declined to be named.
Financial institutions have also been moving to widen the investor base for leveraged financing.
MUFG Bank created Japan’s first LBO debt fund this year, targetting institutional investors including regional banks and insurers.
“Market participation by broader types of investors will help to stabilise financing for deals, as we expect the LBO loan market to grow further,” said Jin Nishikawa, who heads the bank’s M&A finance department in Japan.
