Program on Alternative Investments
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CENTER ON JAPANESE ECONOMY AND BUSINESS PROGRAM ON ALTERNATIVE INVESTMENTS AOZORA BANK: THE CONTEST OVER, THE FUTURE BEGINS Louis J. Forster, President, Cerberus Japan he Program on Alternative Investments, under the aegis T of the Center on Japanese Economy and Business and in cooperation with the student-run Japan Business Association of Columbia Business School, hosted the first seminar of the new academic year on September 24, 2003. The event featured Mr. Louis Forster, the president of Cerberus, Japan, and was moderated by Dr. Mark Mason, director of the program. Mr. Forster’s presentation focused on Cerberus’s acquisition of Aozora Bank and his vision for the bank’s future development. Following are excerpts from Mr. Forster’s presentation, together with selections from the subsequent question-and-answer period. The Program on Alternative Investments analyzes several major alternative asset classes—including private equity, hedge funds, distressed investments, and commercial real estate—in Japan and elsewhere in East Asia. The program meets its substantive goals through a combination of research projects and seminar presentations by leading practitioners in each of the alternative asset classes. Throughout the year, the program also conducts cutting-edge research on these topics under the direction of Dr. Mason and with the assistance of highly qualified research assistants. For a schedule of upcoming seminar presentations, consult the Center’s Web site at http://www.gsb.columbia.edu/japan. Dr. Mason can be contacted by e-mail at [email protected]. Lead Sponsors: Nomura Funds Research and Technologies Co. Ltd.; Daido Life Insurance Company 2 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Aozora Bank: The Contest Over, the Future Begins 3 The basic investment thesis is that relative to any other AOZORA BANK: bank in Japan, and relative to most banks in Asia, Aozora THE CONTEST OVER, has a very clean balance sheet. It has a substantial excess THE FUTURE BEGINS capital base. —Louis Forster Louis J. Forster, President, Cerberus Japan September 24, 2003 Mr. Robert Fallon poses a question to Mr. Forster. Cerberus Overview Cerberus’s primary strategies are Private equity investments are focused largest independent, sub-prime con- following its nationalization in I am here to speak specifically about distressed debt, loan origination, on businesses requiring operational sumer auto finance companies in December 1998. There are various the Aozora Bank transaction. During private equity, and real estate. All of and financial restructuring. Cerberus the United States. Cerberus originally determining characteristics of the my initial comments, I will tell you our work comes out of the distressed invests in a wide range of industries, invested in the company in 1998 long-term credit banks, the main one the key to how Cerberus won the debt area. Cerberus has $11 billion including electronics, automobiles, and exited in 2002. I mention the being that they are eligible to issue contest for the bank and then talk under management. About $4 billion medical equipment, consumer prod- transaction not so much because it debentures. Aozora is rated Baa2 by about two core areas of opportunity of that is targeted toward Asia, $1 bil- ucts, retail, distribution, financial, real was a successful investment, which it Moody’s in long-term bank deposits for Aozora moving forward. These lion of which is invested in Aozora. estate, and software. Cerberus has was, but mainly because Mr. Edward and Baa3 in senior unsecured debt. include attacking the excess deposit Since early 1998, when we opened several investment cases in the finan- Harshfield will be the chairman and It is rated BBBpi by S&P in long-term problem in Japan and discussing the our office in Japan, Cerberus has cial sector. Some of the more notable representative director of Aozora local issuer credit. Aozora has approxi- future of Japan’s regional banking invested slightly less than $4 billion. ones are Ableco Finance, one of the Bank. Cerberus met him during the mately 1,500 employees and 17 domes- situation, which plays a very large Today, the capital available for the largest high-yield loan originators in Mercury Finance transaction. tic branches. The bank does almost all role in the Japanese financial system, Japanese market is roughly equiva- the United States. It is wholly owned of its business in the Tokyo and Osaka Cerberus also invested in Korea First even though it is less well known to lent to the total investment there to by Cerberus. Ableco has transferred areas. Its balance sheet is approxi- Bank, one of South Korea’s top tier non-Japanese. date. My specific company, Cerberus some of its experience and technique mately $53.5 billion; loans are $29.6 banks. It is ranked seventh in asset Japan, K.K., is a consultant to the to Aozora’s platform in Japan. billion; shareholders’ equity is $4.5 size. Cerberus owns approximately Cerberus was founded in 1992 by fund management companies, which Cerberus has been managing Ableco billion; and the capital adequacy ratio 15 percent of the bank. Stephen A. Feinberg. During the 10 companies in turn manage the invest- since the late 1990s. Their outstanding in domestic standards is 13.3 percent years before he founded Cerberus, ment funds of the Cerberus Group. balances today total several billion (note: exchange rate is $1=110 yen). Aozora Transaction Overview Mr. Feinberg operated as Feinberg We provide active advice and sup- dollars. Aozora was established in April 1957 Cerberus originally expressed interest Management. Since 1982 he has port to fund management companies Cerberus was one of the main credi- as a long-term credit bank in Japan. in acquiring Aozora Bank in 1999– always been involved with distressed regarding the group’s activities in tors of Mercury Finance during its It was acquired by the consortium 2000 during the auction process debt, bankrupt corporations, and Japan, but the decision making is restructuring. Mercury is one of the led by Softbank in September 2000, arranged by the Japanese govern- other forms of credit investing. conducted elsewhere. 4 Center on Japanese Economy and Business Program on Alternative Investments Alternative Investments Report Aozora Bank: The Contest Over, the Future Begins 5 ment. This period of time was just adviser, as well as the support of the had it not had the contractual right to The Japanese Banking System in the aftermath of Ripplewood’s Japanese regulatory authorities. buy the shares. Mr. Feinberg thought and the Close Relationship between leading the acquisition of Long-Term the price was a pretty good one since I. JAPAN’S FINANCIAL INSTITUTIONS OVERVIEW Aozora and Regional Banks When Cerberus became an investor Credit Bank, now Shinsei Bank. it is very rare anywhere in the world Funds per The commercial banking system in during the first go around, one of the Total funds institution Number of Branches per Number of The Japanese regulatory authorities that you can buy a bank at less than Japan is composed of city banks and terms of the shareholder agreement Category $ billion $ million institutions institution employees and the Japanese political class were one times clean book. In this case regional banks. There are also long- binding Cerberus, Softbank, ORIX, City Banks 2,336 467,223 5 531 102,049 term financial institutions, which very straightforward in explaining it was a little complicated, but on a Regional Banks 1,541 24,085 64 119 136,588 and Tokyo Fire & Marine was a right that they were not going to sell the fully diluted basis, Cerberus actually Tier II Regional Banks 469 8,850 53 72 58,088 used to include Nippon Credit Bank of first refusal. If anyone of these two banks in a row to foreign firms. bought the bank at roughly two-thirds Long-term Credit Banks 43 21,495 2 23 3,611 (NCB), now Aozora; Long Term four firms desired to sell its shares, it Trust Banks 321 45,840 7 46 22,664 After it was clear that Cerberus was of what was thought to be a fairly Credit Bank (LTCB), now Shinsei; would have to offer them to the rest Shinkin Banks 863 2,648 326 25 127,571 not going to win, Mr. Feinberg enlisted clean book. Cerberus successfully Credit Co-ops 124 647 191 10 24,422 and Industrial Bank of Japan (IBJ), of the group first. Thus, Cerberus had the help of Dan Quayle, who sits closed a tender offer on September 5 Subtotal 5,697 — 648 — 474,993 which is now part of the Mizuho on Cerberus’s U.S. advisory board, to acquire 49.8 percent holdings and Labor Banks 112 5,315 21 33 10,949 Group. In addition, there are trust to speak to Masayoshi Son of Soft- became the largest shareholder with Shoko Chukin Bank 97 96,928 1 102 4,691 banks and a variety of financial insti- The Norinchukin Bank 386 385,797 1 41 2,764 bank to request that Cerberus be Aozora’s basic business plan 61.9 percent holdings in the bank. tutions for either consumers or small Agricultural Co-ops 408 345 1,182 19 263,342 given a small part of the transaction. is to provide services to the Post Office 1,944 1,944,447 1 24,176 131,602 businesses, and there is a farmers’ The basic investment thesis is that Cerberus initially acquired a 5.0 per- Subtotal 2,947 — 1,206 — 413,348 cooperative network. regional banking network and relative to any other bank in Japan, cent stake in Aozora in September Total 8,644 — 1,854 — 888,341 to provide avenues whereby and relative to most banks in Asia, Even though there are many fewer 2000 as part of the group led by Source: Analysis of Financial Statements of All Banks, The Second Association of Regional Banks, Shinkin Aozora has a very clean balance Central Bank, The Shinkumi Federation Bank, The Central Labor Bank, The Ministry of Agriculture, Forestry and banks in Japan than in the United Softbank.