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Opinion

Seller's remorse should not confine Shinsei Bank's future

Demand for 'repayment of public funds' impedes a constructive path forward

| Japan
Shinsei Bank's branch in Yokohama: the bank is a middling domestic retail bank without a clear identity or direction.   © Reuters

Stephen Givens is a corporate lawyer based in Tokyo.

The fate of Shinsei Bank, once the world's ninth-largest bank when it operated as the Long-Term Credit Bank of Japan (LTCB), remains hostage to the Japanese government's remorse over bad decisions made over two decades ago.

By conservative estimate, $3.5 billion of public funds was spent rescuing LTCB after it collapsed and was nationalized in 1997. Today, all the government has to show for the expenditure is a 20% stake in Shinsei Bank, worth $900 million at the current sub-2,000 yen ($18) per share stock price.

Compounding the remorse, in 2000 the government sold LTCB to U.S. private equity fund Ripplewood Holdings for a nominal sum while agreeing to a now-infamous "put option" that left the government holding the bag for LTCB's nonperforming loans.

Thanks in large part to the put option, Ripplewood was able to clean up Shinsei's balance sheet and sell the story that, under enlightened foreign management, Shinsei was being reinvented as a successful retail cum investment bank.

The result was Shinsei's 2004 initial public offering, hailed at the time as "the most profitable private equity deal of all time" by Carlyle co-founder David Rubenstein, that saw shares surge 58% in the first day of trading to 8,000 yen and made billionaires of the American dealmakers behind Ripplewood.

Shinsei never lived up to its IPO hype. By 2007 it was trading below 4,000 yen per share. With the coming of 2008 financial crisis, it fell to 2,000 yen per share, a level from which it has never recovered.

Ripplewood, having profitably cashed out, left Japan in 2012. The foreign executives and consultants who populated the top floor of Shinsei's headquarters building overlooking Hibiya Park are now long gone.

Today, Shinsei is a middling domestic retail bank without a clear identity or direction. Japan's zero-interest monetary policy has rendered the banking business as a whole unprofitable. Japan's four megabanks, like Shinsei, trade at a 50% discount to book value.

In this glum context, a merger with a nonbank financial business like SBI Holdings, an online retail broker and financial services provider that currently holds 19.5% of Shinsei and has launched a tender offer that would increase its stake to 48%, could be a constructive path forward.

The government's unrequited remorse over past mistakes, however, is proving to be an obstacle. It is unclear if the government will let a deal go forward unless it makes provision for the "repayment of public funds", a term of art that requires some explaining.

For years, Shinsei, no doubt under pressure from the government, has dutifully declared that it is committed to repaying public funds. The phrase implies a debt obligation. Shinsei's balance sheet, though, shows no outstanding government loans.

Repayment of public funds, in fact, refers to something quite different -- the overhang between the $3.5 billion the government has plowed into Shinsei and the $900 million that its 20% stake is worth today.

Shinsei's vow to repay public funds, it turns out, is nothing more than wishful thinking that the stock price will recover to the post-IPO 8,000 yen per share level and allow the government a face-saving exit in which it can claim not to have squandered taxpayer money.

Shinsei's recent revelation of a proposal it received from SBI Holdings in 2019 shows the startling extent to which the implicit requirement for any deal to repay public funds is standing in the way of a rational path forward.

SBI Holdings proposed an elaborate four-step plan in which it and the government would leverage their 40% combined share ownership to buy and squeeze out general shareholders at the current stock of price of 2,000 yen per share, to be followed by a buyback of the government's 20% at 8,000 yen per share to enable the repayment of public funds.

Shinsei properly objected that the plan illegally discriminated against general shareholders. If the discriminatory plan were disclosed to general shareholders, as it should be, they would refuse to go along.

That SBI Holdings thought it necessary to concoct a clearly illegal deal to repay public funds is shocking enough. Even more so is the possibility that the government had a hand in constructing the scheme.

SBI Holdings President and CEO Yoshitaka Kitao, pictured in July 2020: that SBI Holdings thought it necessary to concoct a illegal deal to repay public funds is shocking enough.   © Reuters

SBI Holdings' current tender offer for up to 48% of Shinsei's shares at 2,000 yen per share makes no provision for a special deal to repay public funds.

SBI Holdings President and CEO Yoshitaka Kitao has advanced his case that a tie-up with his company will lift Shinsei's corporate value higher than would other candidates like rival internet broker Monex Holdings, an apparent hint that the government should forget about recovering historical sunk costs and pragmatically focus on the future.

For future reference, the government should not forget the combination of naivete and cynicism that led to the transfer of LTCB to Ripplewood in 2000.

Many were naively misled that foreign masters could revitalize the Japanese corporate culture that ended in LTCB's demise. Others cynically saw the transfer as a convenient way of handing off the dirty work of employee layoffs and debt collection to outsiders.

Those are past mistakes from which to learn but which cannot be undone. What remains of Shinsei Bank's future should not be held prisoner to regrets about the past.

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