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June 19, 2012 4:55 pm

Aozora circled by foreign banks as government preferred stock conversion lingers

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This article is provided to readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors.


Several overseas banks are monitoring Aozora Bank [8304: JP] for a potential acquisition even as the lender could see the Japanese government become its dominant shareholder later this year, sources familiar with the matter told dealReporter.

Preferred stock issued to the government during the nationalization of Aozora’s predecessor Nippon Credit Bank in 1998 will be converted into common equity if the lender does not repay the public funds it received at the time by 3 October.

While Aozora has publicly said it intends to repay the funds and has the wherewithal do so, its talks with stakeholders have stalled, meaning the prospect of a conversion of the preferred shares has grown more likely, the sources said.

If that were to happen, the Japanese government could become Aozora’s second largest shareholder after private equity firm Cerberus with 20% of the bank’s voting rights, making the lender less attractive to some of the suitors.

Yet even with the government’s shadow looming, a number of foreign suitors would appear to still be interested in investing in the lender, said one source close to the Financial Services Agency (FSA). Japan’s financial watchdog was behind the failed merger of Aozora and Shinsei Bank in 2009.

“The thinking of these foreign banks is probably that Aozora, given its strong capital adequacy ratio, would pay back its public funds sooner or later,” the source said.

Crucially, the FSA would now welcome foreign buyers, even those from China, in a reversal of its previously cautious attitude.

Last year Australia’s ANZ was speculated to be in early stage discussions with Cerberus over a possible acquisition of Aozora. This news service reported at the time that it was likely considering a minority stake to start with.


Aozora has publicly stated it intends to pay back the funds, which would avert the mandatory conversion of the government’s preferred stock.

“We have adequate capital,” Brian Prince, the bank’s president, said on 15 May. “We are in discussions with the government and shareholders to repay the funds.”

The government still holds JPY 179.4bn worth of preferred shares in Aozora, after selling some of its initial holdings to Cerberus when the lender listed on the Tokyo Stock Exchange in 2006. Of this, JPY 155.3bn would face mandatory conversion into common shares on 3 October.

At the end of March 2012, Aozora had surplus capital of around JPY 160bn, a spokesperson for the bank noted. It has a core Tier 1 ratio of 17.69%.

“Aozora retains its superior position relative to other Japanese banks in terms of its capital adequacy metrics,” added Mana Nakazora, chief credit analyst at BNP Paribas. “We think Aozora’s management will not see it as a major hurdle.”

Still, analysts said that to repay the funds Aozora may need a drawdown of capital and reserves to increase retained earnings, a procedure that would require an extraordinary resolution.

On 31 May, however, the bank said it had decided against tabling such a proposal to shareholders at its annual general meeting, scheduled for 27 June.

“We are still in talks with our stakeholders to repay the public funds,” the Aozora spokesperson said. “Our stance has not changed.”

Delicate balancing act

One possible major stumbling block is that the government wants to recoup JPY 222.3bn or JPY 489 per share to avoid a burden on taxpayers, though the face value of the preferred shares due 3 October is JPY 155.3bn.

An official FSA said: “Preferred stock acquired through capital injections should be disposed of on the basis of fair value based on factors including current market value.”

It would be unthinkable for the government to extend the 3 October deadline for repaying public funds, he added.

If Aozora buys back the preferred shares at the government’s target price, it will end up paying a huge premium to the government over the current share price of JPY 165, which other shareholders could regard as unfair.

Aozora has to consider the interests of all parties, but at this juncture talks between the lender and its stakeholders appear to have reached a stalemate, the source close to the FSA said. The price it ultimately pays to buy back the shares must achieve a delicate balancing act between avoiding a taxpayer burden, reflecting the market’s valuation, and being acceptable to the FSA and ordinary shareholders.


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