Tokyo Star Bank: Advantage Partners-controlled funds in technical breach of covenants on JPY 120bn LBO loan

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

--------------------------------------------------------------------------------------------------------

Advantage Partners-controlled funds, the parent companies of Tokyo Star Bank, have breached covenants of a JPY 120bn (USD 1.3bn) senior LBO loan, prompting creditors to demand an equity injection from the funds, sources told Debtwire.

The funds first breached pre-tax income and return on assets covenants on the loans at the end of the September 2008 test date, and again at the end of March, according to one of the sources with knowledge of the situation. “It is now an event of default,” the source said.

In the first quarter of its financial year 2010 (April to June 2009), the bank made a pre-tax loss of JPY 2.52bn versus the corresponding quarter’s pre-tax income of JPY 2.36bn, according to information on the bank’s website. The losses were due to written off loans and provisions for loan losses from its category 4 claims – defined as “those claims against legally or virtually bankrupt borrowers that have been judged as uncollectible.”

In the FY09 ended 31 March this year, the bank had posted a pre-tax income of JPY 741m, versus FY 08’s JPY 23.65bn.

Creditors to the JPY 120bn five-year senior, secured facility have demanded that the funds inject equity into the business to cure the breaches, the sources said. The more aggressive creditors are demanding that Advantage Partners inject as much as JPY 50bn (USD 542m) into the business, while the more “realistic” demands are for the funds to put in between JPY 20bn to JPY 30bn, said one of the sources who is a major creditor.

In addition, creditors are also demanding that the funds begin making monthly repayments of the senior secured facilities, the creditor source said. The five-year senior, secured loan facility has a predominantly bullet repayment schedule with semi-annual interest payments.

However, Advantage Partners has so far said it is unable to inject funds, but this is most likely a starting-point negotiating position on the private equity firm’s part, said another bank creditor.

The funds are not likely to be in a position to inject equity into the business, the first source and the creditor source said. “Even JPY 20bn equity injection is going to be tough for them,” the first source said. Owing to the economic downturn, its LPs are not able to invest anymore capital into the funds, they said. “They’ve invested a lot of money (into Tokyo Star Bank). I don’t think Advantage Partners can do anymore capital calls,” the first source added.

However, other creditor sources noted that Advantage Partners had in June this year injected about USD 50m into GST AutoLeather, as part of the private equity’s funds restructuring of the automotive leather upholstery company, as reported. The equity injection went towards paying interest and partial repayment principal on the USD 172m LBO loan that part funded Advantage Partner’s buyout of GST AutoLeather in 2007. GST’s creditors, in exchange for the equity injection, granted a waiver of covenants for two subsequent quarters.

In the absence of an equity injection, Advantage Partners has been seeking to sell stakes in its investment to Asian investors, according to the first and the creditor sources. However, all the sources were sceptical that any sale would emerge. “They [Advantage Partners] have been tossing the idea of a sale for a long time but no one is biting,” said one of the bank creditors.

A steering committee of creditors has not been formed but talks with the PE fund and Tokyo Star Bank are being led by Aozora Bank, Calyon, Credit Suisse, Merrill Lynch, Shinsei Bank, and Unicredit, said two of the sources. All of these banks, with the exception of Aozora, were lead arrangers for the LBO loan.

Advantage Partners too is also working on a business turnaround plan. The fund is coming out with methods on how to “value-up’ the bank’s business, the first source said. One of the plans is for Tokyo Star Bank to expand its distressed asset investments by buying discounted Japanese bonds and structured loans in the secondary market, the first and the second source said.

“Here’s the logic of their business plan,” said one of the bank creditors, who is sceptical of the plan. “’We [Tokyo Star Bank] bought assets at too high a price so let’s average down by buying more of this stuff.’ Mathematically it makes sense but I don’t know where they are going to get the money to do this.” The banker noted that Tokyo Star Bank has in the past suffered large losses related to its investments in collateralised debt obligations and CLOs.

According to TSB’s financials for the fiscal year ended 31 March 2009, the bank suffered a net loss on securities amounting to JPY 9.14bn, compared to a JPY 13.19bn loss in FY08. The JPY 9.14bn loss compares to the bank’s income (before taxes) of JPY 741m. Income before taxes in FY08 had been JPY 23.65bn. Excluding the extraordinary losses, income before taxes in FY09 would have been 12.3 times higher, said an analyst.

With some of the pillars of its business model having crumbled - TSB specialised in the business of leveraged and structured finance in Japan’s real estate lending, leveraged buyouts and mortgage lending - the bank is also apparently seeking to grow via acquisitions, the banker noted. CEO, Robert Berardy has also been reported to have said, in a media interview, that the bank is “seriously considering” the acquisition of another bank, the banker noted.

Advantage Partners in Hong Kong declined to comment.

As reported, Advantage Partners received the nod from Japan’s Financial Services Agency to acquire 68% of Tokyo Star Bank from Lone Star in December 2007. That led to Advantage Partners mounting a full-fledged buyout with the bank taken private and delisted on 27 July 2008.

The borrowing entity in default of the loans is Sunshine Financial Holdings, a special purpose vehicle, one of the banker sources said.

Tokyo Star Bank’s parent companies are Japan Ireland Capital Partners Ltd, Cayman Strategic Partners LP, Japan Banking Investment Partners LP and Tokyo Capital Management Partners LP, according to information on the bank’s website.

In addition to the JPY 120bn senior, secured loan, the acquisition was also funded with JPY 47bn subordinated tranche split into JPY 16bn 5.5-year second lien mezzanine and JPY 31bn 5.5-year payment in kind notes.

Major lenders to the JPY 15bn mezzanine were Merrill Lynch and Shinsei Bank, while Citadel Investments, Daiwa Principal and TPG-Axon were major lenders to the JPY 31bn PIK mezzanine.

In addition to Aozora Bank, Calyon, Credit Suisse, Merrill Lynch, Shinsei Bank, and Unicredit, lenders to the JPY 120bn senior facility are DBS Bank, Gibraltar Life Insurance, Kyodo Leasing, Lone Star, Mitsui Sumitomo Insurance, NEC Leasing and NTT Finance.

The senior and junior facilities were lent to the Advantage Partners’ controlled-holding companies. A merger of the holdcos and the opcos had been planned, but for regulatory reasons did not take place, as reported.

--------------------------------------------------------------------------------------------------------

For more information or to inquire about a trial please email sales@debtwire.com or call Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731