A History of Japan’s Government-Backed Rehabilitation Funds



INTERNATIONAL INSOLVENCY INSTITUTESixteenth Annual International Insolvency ConferenceTokyo, Japan III NextGen Leadership Program and Class V InductionJapan’s Government-Backed Rehabilitation Funds Taking Stock of Over a Decade of Company RestructuringsByZentaro NiheiAnderson Mori & TomotsuneTokyo, JapanJune 6-7, 2016?International Insolvency Institute 2016. All rights reserved.Japan’s Government-Backed Rehabilitation Funds Taking Stock of Over a Decade of Company RestructuringsZentaro Nihei Through different incarnations, Japanese government-backed funds have played a significant role in company restructurings in Japan since the early 2000s. The Industrial Revitalization Corporation of Japan (“IRCJ”) came first in 2003, and then was followed by the Enterprise Turnaround Initiative Corporation (“ETIC”) in 2009, now known as the Regional Economy Vitalization Corporation (“REVIC”). A number of other government-backed funds have been formed since 2003, particularly in 2009 and thereafter as a part of the Japanese government’s initiatives to promote the recovery of the Japanese economy. Among these, the Innovation Network Corporation of Japan (“INCJ”) in particular has gained media attention, although it is different in nature from IRCJ and REVIC which were established specifically for the purposes of supporting the rehabilitation of companies in financial distress. Formed through a combination of Japanese government as well as private investment, these Japanese government-backed funds were established specifically for the purpose of providing relief to companies burdened with debilitating financial debt (“Government-Backed Rehabilitation Funds”). They have supported the swift revival of many troubled companies in Japan and allowing business value to be preserved by coordinating the cooperation of the creditors in out-of-court voluntary workouts. They also provided relief to Japanese banks burdened by debt overhang since the collapse of the bubble economy, as the funds purchased non-performing loans (“NPLs”) in the process. While praised for these achievements, the use of public funds in company restructurings has also been criticized. Some have argued that government-backed funds squeeze out potential investments from the private sector. Many also argue that this support unduly allows loss-making companies to survive, thereby preventing creative destruction and impeding the development of a healthy Japanese economy. The focus of this paper will be the role of IRCJ and ETIC through to its transition to becoming REVIC in the restructuring of Japanese companies in financial distress. This paper will provide an overview of IRCJ and REVIC; the process applied by them when investing in troubled companies; and their track record in Japanese company restructurings to date. This paper will then evaluate their achievements with a view to promoting further discussion on the role of Government-Backed Rehabilitation Funds in company restructurings in the future. While INCJ will not be a focus of this paper, the activities of INCJ will be touched upon, and the implications of its existence in competition with other government-backed funds and the private sector will also be discussed.A History of Japan’s Government-Backed Rehabilitation Funds The rise of Government-Backed Rehabilitation Funds with the express aim of supporting company rehabilitation began in 2003 with formation of IRCJ pursuant to the Kabushiki Kaisha Sangyo Saisei Kikou Ho (Industrial Revitalization Corporation Act). IRCJ completed its mandate in 2007, and the formation of ETIC then followed in June 2009. Both IRCJ and ETIC contributed to company restructurings in Japan by establishing an out-of-court process for company rehabilitation characterized by the following:Implementing due diligence on the financially troubled companies so as to evaluate the enterprise value (“EV”) and to produce a restructuring plan based on the calculated EV. Based on the calculated EV and prepared restructuring plan, proposing to the financial creditors such as banks to dispose the debts of the troubled companies at lower price than its book value, or approve the plan including haircuts or rescheduling of debts. Making the plan effective by procuring the cooperation of all affected financial creditors, diminishing the debts and supporting he management of the debtor’s business. While the background surrounding the formation IRCJ and ETIC differs, they applied the same approach to company restructurings by using the funds raised through government guarantees for company restructurings to purchasing the loans of companies burdened by huge debts, or to invested in them, and within a set timeframe, increase business value and then exit by way of a redemption of the loans or sale of the debtor’s shares depending on the type of assistance provided.IRCJ (2003 - 2007)Background In October 2002, in the background of the stagnation of the Japanese economy, the Japanese government announced its “Comprehensive Measures to Accelerate Reforms for the Revitalization of the Japanese Economy.” One of the primary policies included among these initiatives was the “Program for Financial Revival” announced by the Financial Services Agency (“FSA”) and aimed at resolving the non-performing loans of the Japan’s major banks. The FSA proposed the formation of a government fund as means of reviving the competitiveness of Japanese industries. The envisioned strategy was for a government-backed fund to assist companies in financial distress by facilitating inter-creditor cooperation while separating performing business resources from excessive debt. Helping Japan’s troubled companies to recover quickly in this way was also believed to be necessary to swiftly provide relief to the debtor’s financial institutions bearing the NPLs. It was in this backdrop that IRCJ was tasked with supporting the rehabilitation of companies according to these key principles. Even prior to the foundation of IRCJ, another government-backed fund called the Resolution and Collection Corporation (“RCC”) was also in existence with the function of purchasing non-performing loans from financial institutions. However, its main purpose was not company rehabilitation and it did not have enough resources to intensively focus on debt restructuring of financially struggled companies. In this light, IRCJ was unique in its existence and elicited much attention from corporate Japan at the time. In the course of the discussions preceding the formation of IRCJ, views were mixed as to involvement of the government in company restructurings. There were some policymakers who argued that it would be better for company restructurings to be handled by private companies. In the other camp, many argued that it was difficult to make arrangements between the debtor’s main bank and other financial institutions without public involvement especially with respect to troubled financial institutions, in an environment where the market was not yet developed enough for company restructurings. The culmination of these discussions was the promulgation of the IRC Act in April of 2003 and the formation of the IRCJ on April 16, 2003 with its particular focus and characteristics as shall be described in further detail below. Term of Operation IRC Act established a maximum term of five years for the existence of IRCJ, based on the idea that it would address the exigent circumstances of the time, and once conditions improved, company restructurings would appropriately be handled by the private sector. Following its formation, IRCJ made progress at a faster pace than expected as the Japanese economy recovered, and by March 2007, four years after its formation, it was decided that IRCJ’s mandate had been completed. IRCJ was dissolved that month, and its liquidation was completed on June 5, 2007. Financial Support from the Government IRCJ was formed as a corporation (kabushiki kaisha) taking the capital and management structure of the common private corporation. Notwithstanding its corporate form, IRCJ was effectively entirely owned by the Japanese government following the IRC Act, with 98.5% of its shares held by the DICJ (a special corporation to provide deposit insurance system and to contribute to the stability of the financial system in order to protect depositors) itself, also controlled by the Japanese government) and the remaining 1.5% held by the The Norinchukin Bank, a financial institution pursuant to the Norinchukin Bank Act. IRCJ financed its activities through borrowings from private sector financial institutions. These loans were guaranteed by the government within a scope approved by the Diet. Between 2003 to 2005, the Diet approved a guarantee limit of 10 trillion yen for IRCJ’s financing to purchase loans. In 2006, due to the falling number of restructuring projects, this limit was reduced to 3 trillion yen. With this government guarantee, IRCJ was able to procure the necessary financing from private financial institutions for its rehabilitation projects. Mechanics of Governance Because government support such as the government’s guarantee of loans was provided, the authority to make decisions on matters regarding each restructuring project was held by the “Industrial Rehabilitation Committee” the primary decision-making body for most of IRCJ’s functions, comprised of the directors of the IRCJ as approved by the government. Its permitted activities were also limited to the scope of company rehabilitation, specifically, providing financing to lenders, by purchase of debts, guaranteeing the debtor’s loans from financial institutions, investing funds, and the disposition of loans and investments.ETIC (2009-2013), REVIC (2013 -) Following the liquidation of IRCJ in 2007 and as economic conditions again took a turn for the worse, ETIC was launched in 2009 for the purposes of company rehabilitation, and particularly at that time to assist with the turnaround of Japan Airlines (“JAL”) which was completed in 2012. In 2013, ETIC’s name was changed to the name by which it is now know, and its role was expanded such that it now currently operates funds not only for company rehabilitation but also for regional revitalization. Background In the year following the dissolution of IRCJ came the sudden collapse of Lehman Brothers, which then quickly spiraled into the financial crisis referred to in Japan as the “Lehman Shock”. As one of Japanese’s government’s responses to the deepening financial crisis and the threat to Japan’s regional economies, in June 2009 the Kabushiki Kaisha Kigyo Saisei Shien Kikou Ho (Act on the Enterprise Turnaround Initiative Corporation) was promulgated, for the formation of ETIC in the same year. Like IRCJ, ETIC’s purpose was to support the rehabilitation of companies in financial distress, and thereby support regional economic recovery. Its authorized activities included the purchase of loans from financial institutions, investment, as well as to assign managers to the debtor company. Although at the time of its launch, ETIC’s first and foremost task was to assist in the rehabilitation of JAL as an emergency rescue as its situation deteriorated further after years of financial struggles, it was envisioned that its general mandate thereafter should be limited primarily to small and medium sized enterprises burdened by excessive debts (“SMEs”) in order to maintain a limit on the government’s involvement in company rehabilitations. For similar reasons, ETIC’s charter also specified a limited term for its existence of five years; however, given the continued economic uncertainty at that time, amendments were enacted in March 2012 for the extension of its term for the purposes of supporting the recovery of SMEs. Pursuant to further amendments to the law in March 2013 which changed the name of ETIC Act to the Regional Economy Vitalization Corporation Act (“REVIC Act”) and ETIC’s name to the name by which it is currently known. The amendments expanded REVIC’s ability to support company rehabilitations as shall be discussed in further detail below, and to date, REVIC continues to be used often for company rehabilitations and currently contributes to the rehabilitation of SMEs in a wide wage of industries.Term of Operation As discussed above, due to the amendments of March 2013, REVIC’s term was extended so that it may continue to commence projects until March 31, 2018, except that projects pertaining to applications accepted prior to the amendment of the REVIC Act may be commenced until September 30, 2018. Financial Support from the Government Similar to IRCJ, the capital of REVIC is comprised of investment by the DICJ which in turn is comprised of investment from the DICJ’s investors, primarily the Japanese government and various financial institutions. REVIC also obtains financing for its activities from private sector financial institutions, having the loans guaranteed by the government within a limit approved by the Diet. As at the end of March 2016, the approved guarantee limit is set at one trillion yen. Like IRCJ, this government guarantee has helped REVIC procure the necessary financing from private financial institutions for its company rehabilitation projects.Mechanics of Governance In the beginning, from the viewpoint of fairness and neutrality, the view was that all determinations for REVIC’s assistance should be made entirely by the Regional Economic Vitalization Committee. However, this requirement began to be seen as time consuming to the effect of preventing swift support for debtors. Accordingly, in order to enable REVIC to provide assistance more nimbly, the REVIC Act was amended to make rehabilitation assistance possible for enterprises even without the committee’s approval, subject to certain limited exceptions. REVIC’s scope of activities were originally it was limited, as it was for IRCJ, to the activities categorized as “assistance for company rehabilitation”, primarily through the purchasing of loans. However, through amendments of March 2013 “fund management activities” were added to the list of REVIC’s authorized activities. As a result, REVIC became able to manage company rehabilitation as well as regional vitalization funds. In June 2013 a fund managed by REVIC together with private sector enterprises, created a subsidiary of REVIC called, REVIC Capital as an entity to undertake the role of rehabilitation and the financing needs of enterprises engaged in investing in regional revitalization.Process The process applied by IRCJ and REVIC is one that is characterized by careful planning giving regard to its own internal approval process as well as the delicate circumstances of the debtor. This derives from the circumstances from which need for these Government-Backed Rehabilitation Funds arose and the challenges of an out-of-court workout. Previously in Japanese out-of-court workout practice, the debtor’s main bank as the primary financial institution creditor would play the primary role to coordinate inter-creditor cooperation among the financial institutions; however, along with the changing the culture of Japanese companies relying on a main bank, it became increasingly difficult to make arrangements between the financial institutions, specifically with the non-main banks. This became particularly acute in company restructurings involving a number of different banking groups. Government-Backed Rehabilitation Funds starting with IRCJ provided the opportunity for a different kind of process initiated by the debtor or its creditors, and conducted by the Government-Backed Rehabilitation Fund as a more neutral party. The support that the Government-Backed Rehabilitation Funds were designed to provide was primarily the purchase of loans; however, they were also permitted to coordinate rehabilitation plans. Because the success of an out-of-court voluntary process depends on the cooperation of the major stakeholders, the Government-Backed Rehabilitation Funds established a process strongly founded on the principle of fairness among the financial creditors. The major steps of the process applied by the IRCJ as well as REVIC are as follows: Initial Contact – Informal Discussions Due diligencePreparation of the rehabilitation planOfficial Application / Project IntakeRequest for temporary stay Creditor arrangementsApproval of the rehabilitation plan/commencementImplementation of the rehabilitation plan The practice represented in these steps is marked by an emphasis on prior discussions and consensus building even before an application for assistance is formally submitted. Precautions are also put into place and arrangements made at an early stage in order to avoid creditors from taking self-interested actions that could derail the process. These concerted efforts are generally aimed at avoiding waste of resources on projects without adequate prospects for success as well as avoiding the harm to the debtor that could be caused if assistance had to be withdrawn after a project has been commenced. The above steps as applied by REVIC today are discussed in further detail below, with some comparisons with the practice of its predecessor, IRCJ.Overview of the Steps in the Process(1)Initial Contact – Informal DiscussionsREVIC does not initiate action to rescue a financially troubled company. The process of restructuring provided by REVIC can only begin with a request for assistance by the debtor, the debtor’s main bank or other stakeholders. The initial contact occurs in the form of informal consultations pursuant to which REVIC may commence its preliminary analysis and discussions with those stakeholders to examine the prospects of rehabilitation. All of these discussions are conducted on an informal basis and are not disclosed to the public. (2)Due DiligenceFollowing the initial discussions with the various parties, REVIC will then examine the prospects of the rehabilitation project through examining proposals or other documentation provided by the stakeholder who requested REVIC’s involvement, generally debtor’s main bank. Following this, REVIC will then conduct a due diligence from business, finance and legal perspectives with the assistance of external advisors. In case the process does not reach the official application process described in (4) below, the cost for the due diligence is as a general rule borne by REVIC.(3)Preparation of a Rehabilitation PlanAround the time that the due diligence reports have been completed, REVIC will begin drafting a rehabilitation plan including debt restructuring. In doing so, REVIC will also conduct discussions with and seek input from the debtor and other main stakeholders (generally the debtor’s main bank) based on the due diligence results. There are no particular rules regulating these discussions, and depending on the case, REVIC may also, on a confidential basis, conduct discussions with other stakeholders or a potential sponsor in cases where such a sponsor has been selected in advance. (4) Official Application Process/Project IntakeFollowing the due diligence and discussions described above, REVIC holds discussions internally to determine whether there are reasonable prospects for rehabilitating the debtor. If REVIC is satisfied that there are, the debtor with the main stakeholders are invited to officially apply for the support of REVIC. Upon completing its internal procedures, REVIC then accepts the application and formally notifies the debtor and its financial institutions of the restructuring plan that REVIC will have developed based on the preceding preparatory steps. In order to commence the project, REVIC will ask the financial institutions for their formal acceptance of the terms which will have been previously discussed (e.g. purchase of loans on specified terms, or a financial haircut as a part of a restructuring plan).In IRCJ’s practice, Assistance Determinations were publicly announced in accordance with the laws governing its process. In contrast, for REVIC projects, public disclosure is not compulsory other than in the cases of large-scale high profile cases approved by the responsible Minister and therefore, where there are concerns that a public announcement could have counterproductive effects on the restructuring process, the names of the debtors are not disclosed. (5)Request for Temporary StayAlongside the negotiations with so called “non-main” banks, REVIC gives careful regard to the potential risk that financial creditors of the debtor may become worried and take measures to collect on the loans or otherwise protect their interests. Accordingly, with a view to preserving the prospects for an orderly and effective process, where REVIC judges there to be a need, it will ask the financial institutions to refrain from enforcing their rights until the completion of the period for purchasing the loans within three months of issuing an Assistance Determination at a maximum. As an out-of-court process, this would be a temporary stay depending entirely upon the voluntary cooperation from the financial institutions. However, because REVIC cannot under its governing statute, purchase the debts from a non-cooperating financial institution, a financial institution risks being left out of the process by not cooperating. Further, if a financial institution’s non-cooperation would constitute a barrier to the necessary conditions for rehabilitation (e.g. a sufficient amount of debt relief), REVIC could withdraw from the project entirely. Accordingly, with these deterrents, REVIC and IRCJ have had success in procuring cooperation with these voluntary temporary stays. (6)Creditor Arrangements Once the intake formalities are completed, REVIC quickly moves to formally enter into agreements with all the financial creditors of the debtor for either the purchase of the loans or the conditions of the rehabilitation plan on terms in line with the prior discussions. Because the financial institutions would effectively be requested to make serious concessions, it is not an easy process. Practitioners in the field have commented that the negotiations between the Government-Backed Rehabilitation Funds and the financial institutions have often been vigorous and drawn out with the financial institutions raising diverse issues ranging from the responsibility of the debtor’s main bank for the debtor’s circumstances[?], feasibility of the restructuring plan and sufficiency of the underlying collateral securing the loans. (7)Approval of the Rehabilitation Plan/Commencement Once REVIC has confirmed the formal commitment of the creditors to the process, REVIC will then proceed with its internal process for formally approving the commitment it will have to make to the process, primarily, the purchase of the debtor’s loans. This constitutes REVIC’s approval of the rehabilitation plan and allows REVIC to move to the implementation stage.(8)Implementation of the Rehabilitation Plan While the debtor ultimately remains responsible for continuing to manage the business and implementing the rehabilitation plan, REVIC monitors and actively supports the process. Support provided by REVIC to the management team includes the provision of personnel who assist the company to develop business strategies, contend with challenges to the business, and restructure human resources and internal controls. (9)CompletionREVIC is currently subject to a time limit of five years to complete a project, by finally disposing of the loans or its other interests in the debtor company. This was increased from the three year period that applied prior to the amendment extending the life of REVIC. Where REVIC’s assistance has been provided in the form of purchasing the debtor’s loans with its financial institutions, it exits the project by collecting on the loan from the debtor through its refinancing. Where REVIC has made a capital investment in the debtor pursuant to a rehabilitation plan, REVIC finds a sponsor to take over the business and sells its shares in the debtor to the selected sponsor. Special Characteristics of REVIC Process The distinguishing feature of the role played by the Government-Backed Rehabilitation Funds that are the focus of this paper is they effectively use their status as government-affiliated funds to coordinate the creditor arrangement process and facilitate agreements on haircuts, thereby preventing inter-creditor problems. This makes these Government Rehabilitation Funds unique from other private funds, or even other government-backed funds that invest in distressed companies. As discussed above, the process applied by the Government-Backed Rehabilitation Funds has been and continues to be a voluntary out-of-court process, initiated by the debtor or one of its creditors and accomplished through the voluntary cooperation of all the creditors. The creditors voluntarily consent to selling the debtor’s loans at a discount to the Government-Backed Rehabilitation Fund, or to financial haircuts to the debts based on the EV of the debtor’s business determined by through due diligence. This difficult task of procuring the consent of the financial creditors to these concessions would not be possible without a reliable, objective due diligence process and rehabilitation plan. From this perspective, the ability of the Government-Backed Rehabilitation Funds to gain the trust of the financial institutions has been key to their success.Achievements Although the Japanese government put in place bailout provisions in case the Government-Backed Rehabilitation Funds failed, remarkably, both IRCJ and REVIC have operated at a profit. IRCJProfile of Restructuring Projects IRCJ has assisted a broad range of companies with capital ranging from ten million yen to 100 billion yen. From its first Assistance Determination in August 2003 by the time of its last project was completed on March 2, 2007, IRCJ completed 41 rehabilitation projects, encompassing 198 companies. Examples of its larger, high profile projects include the restructuring of the cosmetics company group, Kanebo (consolidated total indebtedness of 603 billion yen restructured) and the Daiei group, a supermarket chain (total indebtedness of 1.6 trillion yen restructured). Financial Results Total outstanding loans of all the debtors supported by IRCJ as of the outset of IRCJ’s assistance was 4.254 trillion yen. IRCJ succeeded in negotiating assistance from the financial creditors in a total amount of around 1.4 trillion yen comprised of debt waivers and debt-equity swaps. IRCJ was able dispose of all of the purchased loans and sell off all its interests in the distressed companies acquired as a part of the rehabilitation process at the end of each project. At the end of its mandate, not only were all public funds recovered, IRCJ ended with net assets of 43.5 billion yen. By the end of its liquidation which was completed within a year of its dissolution announcement, IRCJ had distributed residual assets in the amount of 94 billion yen to the coffers of the Japanese national government and the DICJ and paid 31.2 billion yen in national and local taxes. The figures attest to the financial success of the IRCJ. REVICProfile of Restructuring Projects From the period between October 2009 when it was known as ETIC to the end of June 2015, REVIC has contributed to the rehabilitation of 59 organizations. During its business year ended March 2016, REVIC announced another five restructuring projects. Other than a few exceptions, REVIC’s restructuring projects have not been limited to a particular category of business. Although restructuring support for small to middle sized companies is at the forefront of REVIC’s mandate, it can assist large sized companies with the approval of the responsible Minister. Financial Results The combined interest-bearing debt restructured in the 59 projects that REVIC has supported to June 2015 totals 1.2862 trillion yen. The total amount of financial assistance that REVIC was able to negotiate with the financial creditors in accordance with the rehabilitation plans in aggregate was 857.2 billion yen, comprised of 833.1 billion yen in debt waivers and 24.1 billion yen in debt-equity swaps. A large portion of the debt waiver figure comes from REVIC’s most celebrated project undertaken when it was still known as ETIC, the restructuring of JAL for which 521.5 billion in debt of 731.8 billion yen in interest-bearing debt was waived. Examining REVIC’s profit and loss situation during the period between 2009 to the end of March 2015, there was a marked increase of REVIC’s retained earnings to 177.3 billion yen as at the end of its business year ended March 2012. That was the year in which REVIC sold off its shares of JAL in the company’s relisting on the Tokyo Stock Exchange, representing a successful new beginning for JAL and a profitable exit for REVIC in less than two years from commencing this massive project. As at the end of its business year ended March 2015, REVIC still had impressive retained earnings of 100 billion yen. As such, REVIC’s figures demonstrate that it also has been a financial success so far. Evaluating the Impact of the Government-Backed Funds IRCJ and REVIC’s track record of success has generated wide recognition in Japan for the use of public funds for the rehabilitation of companies in distress. Nonetheless, there are also criticisms of the use of public funds for these purposes, some of which shall be highlighted as follows. Entry of the Non-Rehabilitation Focused Government-Backed Funds While recognizing the role of government initiatives in Japan’s economic recovery, in March 2013, the Japan Private Equity Association (“JPEA”) announced recommendations concerning the use of public funds in company restructurings, expressing the concern that “excessive sourcing and investment by the government and its affiliated institutions into high-growth industries and troubled companies may jeopardize a proper division of roles between the public and private sectors”. Specifically, the JPEA recommended that the Japanese government: (1) establish strict standards for investments and loans provided by government-affiliated funds, (2) promote collaboration between the government-affiliated funds and private funds, and (3) conduct follow-up monitoring of investments and loans by government-affiliated funds. One of the JPEA’s concerns is believed to be the activities of INCJ, a government-backed fund which is different in character from REVIC. INCJ is a government-backed fund which was launched in July 2009 just one month after the formation of REVIC, at that time known as ETIC. Its purpose was framed generally as promoting innovation and enhancing the value of businesses in Japan. Its recent activities however, INCJ has shown a strong interest in traditional electronic companies in particular. In contrast to REVIC, INCJ actively seeks out investment opportunities from its end. One of INCJ’s more sensational deals is its 138 billion yen investment in Renesas Electronics Corporation (“Renesas”) a Japanese semiconductor manufacturer, negotiated in 2012. INCJ’s bid for Renesas was reported in the media just less than a month after the U.S. based private equity firm, KKR & Co. (“KKR”) was reported to have presented its proposal to the troubled Japanese company’s main banks and major shareholders at the end of August 2012. According to the media reports at the time, KKR’s proposal involved taking over the management of the company and major restructuring of personnel. Although Renesas appears to have recovered, its future appears uncertain and at the time of this writing, more than two years after completing its acquisition of its stake in the company. INCJ also submitted a competing bid following after talks had begun between electronics giant, Sharp Corp. (“Sharp”) and Taiwan’s Hon Hai, or as it is known in the English language, Foxconn Technology Group (“Foxconn”), regarding Foxconn’s bid for Sharp. This commenced a bidding war between INCJ and Foxconn which many saw an effort by the Japanese government to prevent a foreign company from acquiring Sharp. But this time Foxconn prevailed over INCJ with a higher bid. INCJ’s practice of submitting competing proposals when the target company has already entered into talks with a private firm is open to the criticism that it lacks the economic rationale for the use of the public funds, and that this kind of intervention could actually impair the development of Japanese industry. These activities INCJ’s recent high profile activities do appear to provide a strong argument for the need to establish transparent standards for investment by government-backed funds. They also suggest that in the sphere of company rehabilitation, the use of public funds may be more appropriate for circumstances under which assistance is specifically requested in respect of a company in financial distress where the unique assistance of a government-backed fund is needed for the circumstances. Impact on Competition in the Market While JPEA’s criticisms of government-backed funds may have been directed in part at INCJ in relation to INCJ’s competition with private sector funds, the JPEA’s recommendation for stricter standards on the activities of government-backed funds also addresses the broader issue of their impact on competition in the assisted debtor’s industry. All Nippon Airways, Co. Ltd. (“ANA”), has survived the revival of its competitor, JAL; however, at the time of REVIC (ETIC)’s assistance, some expressed strong concern that such assistance unduly harmed competition in the airline industry. In the amidst the concerns expressed by the private sector, it is significant that this issue has gained enough attention by the Japan Fair Trade Commission (“JFTC”) such that it established guidelines in March 31, 2016 titled “Guidelines for Public Support for Revitalization in view of Competition Policyaddressing the impact of Government-Backed Rehabilitation Funds on competition in the market among the companies assisted (e.g. risk of promoting moral hazard as a result of reliance on Government-Backed Rehabilitation Funds) as well as the and private firms engaged in investing distressed companies. It will be interesting to see how this affects the practice of Government-Backed Rehabilitation Funds as well as how the JFTC will solidify its practice in addressing issues that may arise. Further In-Depth Review Needed Regarding the Impact of Government-Backed Rehabilitation Funds IRCJ was dissolved after five years in accordance with the original premise that it should only exist for a fixed period to meet the exigent circumstances of the time. REVIC, too was established as an entity with a timeline when it was formed as ETIC in 2009; however, its term was extended to mid-2018 and could possibly be extended further if the Japanese government decides to do so. Yet the circumstances today are much different than they were in 2003 when IRCJ was first formed, and even 2009 when ETIC was formed to respond to new challenges. Today, turnaround practice in Japan and the market have developed significantly such that one may wonder whether Government-Backed Rehabilitation Funds are truly necessary at this stage, especially considering that their fixed terms of existence were put into place in regard to the basic premise that this need should normally be satisfied by the private sector. The financial success that the Government-Backed Rehabilitation Funds have had in the area, may conversely suggest that this activity could be handled as, or even more successfully by a private fund. This is a question that has not been sufficiently studied in-depth with data. The data disclosed by the Japanese government measures the success of IRCJ and REVIC by their financial performance as funds; however, not enough analysis is available as to what extent they have succeeded in helping the rescued companies becoming more competitive. This kind of analysis must ultimately be conducted an examination of the rescued companies on a long-term basis. It is even possible that some companies assisted by IRCJ and REVIC may have ended up or will end up in bankruptcy after their exit. This success rate of the assisted enterprise is also something that needs to be tracked over the long term. As discussed above, another issue that needs to be studied is whether the support provided by the Government-Backed Rehabilitation Funds has artificially propped up failing business to the detriment of competition and innovation as a whole in the debtor’s industry. Accordingly, in order to truly determine the success of the Government-Backed Rehabilitation Funds, continued monitoring and collection of data is necessary. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download