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More Japanese blue chips embracing leveraged growth

Historically low interest rates drive record interest-bearing debt load

SoftBank's acquisition of ARM was one of the slew of big deals in 2016 that helped drive corporate debt higher.

TOKYO -- Large Japanese enterprises facing a shrinking domestic market are turning to interest-bearing debt at record levels, using the historically cheap funding to finance overseas acquisitions and labor-saving investments.

But for smaller businesses, dwindling demand at home has left them wary of taking on additional debt.

Time to scale up

"We will borrow and engage in proactive management," said Akira Yamaguchi, president of real estate group Daikyo. As part of a restructuring plan to recover from financial woes suffered over a decade ago, the company has shrunk interest-bearing debt to less than 20% of net assets. Now that it has made major progress on the financial front, it is stepping up procurement of existing condominiums, among similar activities.

The group plans to add around 100 billion yen ($896 million) worth of interest-bearing borrowing over the next four years, roughly 3.4 times the current scale.

Among Japanese corporations with net assets worth a minimum of 1 billion yen, interest-bearing debt stood at a record 241.4 trillion yen at the end of 2016, according to data compiled by the Ministry of Finance. The figure beat the previous high of 234 trillion yen recorded in 1998. Loans stipulating repayment periods of more than one year accounted for half of those liabilities. Corporate bonds jumped 16% from the end of 2015 to 57.3 trillion yen.

Pure holding companies in the service industry have especially embraced leveraged growth. Interest-bearing borrowing in that group soared 60% over three years to 51.6 trillion yen. The share among all firms also climbed from 14% three years earlier to 21%.

"Pure holding companies are procuring more funds for mergers and acquisitions," reasoned Takuya Hoshino of the Dai-ichi Life Research Institute.

Last year, 16.6 trillion yen was spent on M&As, a level not seen since 1999, according to estimates by Recof, a Tokyo-based consultancy in that field. Those megadeals were topped by SoftBank Group's purchase of British chip designer ARM Holdings. Brewer Asahi Group Holdings has also made major acquisitions in the European beer industry.

Innovative investments

Much of the leveraged funds were also directed toward resolving Japan's labor shortage. Supermarket group Yaoko is busy establishing food-processing centers and other installations in order to ease the burdens on outlets facing a chronic lack of workers.

Book publisher Kadokawa has started work on a book factory due to be completed in 2020. The plant will also be equipped with logistic functions where the Kadokawa Dwango unit will form its own delivery network and lower shipping costs. The state-of-the-art production center will also curb bookbinding expenses.

Banks have loaned 48.3 trillion yen for capital investment in 2016, according to the Bank of Japan, the highest level in 19 years. Although a quarter of that will be spent for real estate purposes -- mainly urban development projects ahead of the 2020 Tokyo Olympics -- the companies applying for loans stretch across a growing spectrum.

Staffing conglomerate Recruit Holdings raised 50 billion yen in its first-ever bond float in March. The funds will be used to finance the acquired Dutch temp agency USG People. "The occasion was ripe to secure various means of procurement," said Keiichi Sagawa, a senior managing corporate executive officer at Recruit.

Cash piles

Hiroshi Miyazaki at Mitsubishi UFJ Morgan Stanley Securities has noticed how return on equity is trending higher along with the debt load. "The bigger debt has played a role in improving business efficiency in part through labor-saving and M&A investments," he said.

But sometimes more liabilities are shouldered to shore up finances, and there is no guarantee that those funds will always be used for investments. The BOJ reports that companies are increasingly moving to push forward bond floats and refinancing debt while interest rates are at rock-bottom levels amid the central bank's negative rate policy.

Cash and deposits at large corporations amounted to 60.5 trillion yen at the end of last year, surging nearly 20% from a year earlier. Apparently, corporate managers are setting aside much of the procurement as cash on hand.

Out in the cold

In contrast, small-to-midsize companies are as circumspect as ever when it comes to taking out loans. Interest-bearing debt at firms with net assets below 1 billion yen came to 224.1 trillion yen at the end of 2016, continuing a downward trajectory from the 349.9 trillion yen peak in 1995.

One major hurdle standing in the way is that the negative-rate policy's trickle-down effect has been slow to reach smaller companies. Lending terms offered to those firms track short-term prime rates set by principal banks, and those benchmarks have been lagging indicators.

"While the domestic market is shrinking, it will be hard for small to midsize [companies] to paint an outlook where they increase liabilities and expand operations," said Yasunari Ueno at Mizuho Securities. Capital spending within the bounds of net assets is strongly pronounced among lower-tier enterprises. The Japanese government sees elevated individual productivity among these firms as key to promoting a virtuous economic cycle, but that effect may fail to materialize. 

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