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Health Care

Japanese fund eyes healthy returns in debt-stricken hospitals

Partners to benefit from high-yield bonds while advising on management

In Japan, 54% of hospitals are losing money due to labor and equipment costs.

TOKYO -- Half of Japan's hospitals have fallen into the red amid rising health care costs, offering investors a chance to make money off the piles of debt.

The Development Bank of Japan, a state-owned lender, will launch a rescue fund next month with two private-sector partners. The fund, with an initial value of roughly 4 billion yen ($37 million), will assume the debt held by privately run hospitals and provide management consulting services as well.

The fund looks to reduce the repayment burden for the hospitals by serving as the main creditor. It will collect income from the generous yields produced by the debt.

Industry data shows that 54% of Japanese hospitals incurred pretax losses as of June 2018. Mounting labor costs and capital expenditures have squeezed finances, even for some hospitals with many patients.

The financial support will involve the fund taking on the subordinated bonds issued by the hospitals. Subordinated debt carries a bigger risk premium over straight corporate bonds, and this translates to higher returns. The fund also will buy debt from other financial institutions and securitize assets held by hospitals.

Sumitomo Mitsui Finance and Leasing, an investor in the fund, will use the sales network in its medical equipment leasing business to collect information about hospitals in need of assistance. The other partner, management consulting group Nihon Keiei Holdings, will offer business advice to the hospitals in areas such as restructuring outsourcing costs and procuring materials.

The hospitals face virtually no risk of being taken over by the fund because most are operated as protected medical corporations. The new fund also will support nursing facilities, and additional funds are planned if investments expand.

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