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Deeply risk-averse, Japanese investors pass up Toshiba deal

Cash-strapped conglomerate turned to foreign funds, which may make a killing

TOKYO -- Toshiba's surprise decision to raise some 600 billion yen ($5.34 billion) in a private placement of new shares was the most talked-about deal of the year. Its tapping of overseas funds also helped showcase the lack of Japanese investors willing to go after risky targets.

In the capital increase announced in November, Toshiba opted to issue new shares to about 60 overseas investors in a private placement. "Toshiba would not have had any success if it had taken the deal to domestic investors," said an official of Goldman Sachs Japan, which brokered the deal.

Convincing investors to pour money into a troubled company with a negative net worth is not an easy task. "Japan did not have investors that could supply such a huge amount of risk money with such short notice," Japan Exchange Group CEO Akira Kiyota said at a regular press conference at the end of November.

In the world of investment, risks and returns are two sides of the same coin. After the capital increase announcement, Toshiba stock has risen above the 262.80 yen offering price for new shares to be issued. Overseas investors that have managed to catch the falling knife could pocket sizable returns going forward.

The situation resembles what happened around 2000, when Japan was in the midst of a financial crisis. The Long-Term Credit Bank of Japan, nationalized fin 1998, was acquired by Ripplewood Holdings and reborn as Shinsei Bank. The U.S. investment company earned massive profits by having the bank undergo major restructuring and relist on the market.

Ripplewood was criticized at the time as a vulture fund that swooped in on a struggling enterprise to buy its assets on the cheap. But on the other hand, there were no domestic investors or financial institutions willing to shoulder the risks of turning around a bankrupt company.

Conservative mindset little changed

Nearly two decades later, risk money in Japan still seems to be lacking. The Japan Securities Dealers Association introduced a mechanism last year to make it easier for companies with low credit ratings to issue bonds. The idea is to encourage investors to take greater risks and revitalize the market in the process. But no company has yet to take advantage of the system.

In 2016, corporate bond issuance in Japan totaled a mere 10.6 trillion yen, compared with the roughly 170 trillion yen equivalent in the U.S. market. The biggest underlying cause seems to be the tendency of domestic investors to be caught up in formalities and to follow the crowd.

One major asset manager in Japan is bypassing all companies that have had quality control problems, like Kobe Steel and Toray Industries, an official at the firm said. It is natural that companies mired in scandals come under selling pressure. But more investors in Japan should be able to picture rehabilitation scenarios for sunken businesses.

The few activist investors in Japan are still considered an anomaly here. The more diverse the perspectives of investors, the broader the opportunity for risk money to enter the market.

Japanese investors are willing to cough up money when times are good. But we might see a repeat of domestic investors recoiling when troubled companies ask for help. Toshiba's example ended up raising concerns about the limited investor pool in Japan.

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