Debt Forgiveness during the ‘Lost Decade’:
Impacts of the Industrial Revitalization
Corporation of Japan
9th Macro-Conference at Keio University
December 1, 2007

Satoshi Koibuchi(CUC)
1

Figure 1: Amount of Risk Management Loans in Japan

Billion yen
30,00010.0%
9.0%

25,0008.0%
7.0%
20,0006.0%
15,0005.0%
4.0%

10,000
3.0%
2.0%
5,000
1.0%
0

0.0%

March 2000

March 2001

March 2002

March 2003

March 2004

March 2005

March 2006

Total Amount of Risk Management Loans (Major banks)

Total Amount of Risk Management Loans (Regional banks)

Share to Total Loans (Major banks)

Share to Total Loans (Regional banks)22

Debt-overhang Problem
D＞X＞L
D: Outstanding of existing debt
X: Net present value of project
L: Liquidation value of the projectÆ Existing lenders need to agree to forgive a part ofdebts,
D－X, for the borrower to continue a socially profitableproject with X > L.
Æ However, in the case with many lenders, continuationof the project is not a Nash equilibrium in the noncooperative game .(Gertner and Sharfstein [1991])
Æ It is important how burdens of debt forgiveness, D－X,
would be allocated among many lenders.
3Cooperative game (1) Lender i=(A,B,C), lender share(α>β>γ) S: Coalition
 v(S): Revenue from coalition S
 Sharpley value uniquely determines the payoff,

xi, for lender i as weighted average of payoffs
across possible coalitions.
 Payoff for the largest lender A, xA
xA=(1/3)[v(ABC)-v(BC)]+(1/6)[v(AB)-v(B)]+(1/6)[v(AC)-v(C)]+(1/3)v(A)4

Cooperative game (2):
Fukuda & Koibuchi (2006)
 (A1) αD>βD>γD>X
 (A2) v(A)=αL, v(B)=βL, v(C)=γL
 (A3) Only the largest lender A (Main-bank)bears private cost of Z>0 when the project isliquidated (going bankrupt). v(A)=αL－Z
 Sharpley value of xA
xA=(1/3)(X－L)+αL－(2/3)Z (1)Æ If Z is large, payoff for the largest lender A issmall and then its burden of debt forgiveness is
disproportionally large.
5

Traditional Main-bank-led corporate
restructuring(1) The main-bank enduring the long-term relationshipwith client firms, i.e. having large Z, has strong
incentive to lead the negotiation among lenders forprotecting his reputation as a “sound main-bank” （Hoshi, Kashyap and Scharfstein,1990, Sheard,1994)(2) However, under the circumstances that regulatory
capital requirement exists and bank capital werealready impaired during the 1990s, the main-bank did
not afford to bear such distortionally large burdens ofdebt forgiveness for their clients.
6

Role of the IRCJ: “Delegated negotiator”
Under the IRCJ scheme, the IRCJ takes over the roleof negotiator to coordinate the allocation of burdensof debt forgiveness.
 This is significant difference with the “Guideline forPrivate Liquidation”（私的整理のガイドライン） underwhich the main-bank has to pursue the role ofnegotiator to coordinate many lenders.
 IRCJ that is free from main-bank’s Z has a power toforce new rule of proportional burdens of debt
forgiveness to small lenders. So the IRCJ-support cangreatly mitigate excess burdens of main-bank.
7

Delegation to the third party This is popular discussion for macroeconomics

and corporate finance.
 Conservative central banker
 The government delegates monetary policy to anindependent “conservative” central banker(Rogoff,1985).
 Incomplete contracting approach Allocation of control right among players withdifferent preference (e.g. Aghion & Bolton, 1992).
8

Main-bank share of burdens
Main-bank (MB) share of burdens= Amount of MB burdens of debt forgiveness/ Total amount of debt forgivenessMB share of burdens = MB share of borrowingÙ Excess burdens of MB = 0 (“pro rata”)
MB share of burdens > MB share of borrowingÙ Excess burdens of MB > 0
MB share of burdens < MB share of borrowingÙ Excess burdens of MB < 0
9Sample (1): the ordinary cases
 I pick up major cases of large listed companies

that announced debt forgiveness (and/or debtequity swaps) from 1998 to 2005.
 These are 39 cases related to 35 firms
including 5 cases under the “Guideline forPrivate Liquidation”（私的整理のガイドライン）.
*22 cases for construction & real estate, 9 forwholesalers & retailers, and 8 for manufacturers.

10Main-bank share of burdens: the ordinary cases
Figure 3: Main bank burdens in the ordinary cases
Main-bank share of burdens
Misawa Home

Tomen (2)100%

Kumagai Gumi (2)Shokusan Jutaku Sogo
Araigumi*Nippon Yakin Kogyo
Daisue Construction*Toyo Shutter

Sojitsu

80%

SuzutanKenwood

Kanematsu
Mitsubishi Motors
Chori

60%

Pasco
Towa Real Estate (1)Chuo Paperboard
Toyo Construction*IwatayaDaikyo*Seibu Departiment Store
Nissan Diesel
Kumagai Gumi (1)Mitsui Construction

Sumitomo
Constuction
Fujita*Sata Construction

Towa Real Estate (2)Nakano Corporation

Isuzu Motors

Tomen (1)Sampei Construction

Sato Kogyo

Daiei

Hazama Tobishima

40%

Aoki Corporation
Haseko (2)Haseko (1)20%Main-bank share of borrowing
0%
0%

10%

20%

Construction (19 cases)
Manufactures and others (8 cases)

30%
Real Estate (3 cases)

40%

50%
Retailers (4 cases)
45 degree line

60%

70%

80%

Wholesellers (5 cases)

90%

11
11

Sample (2): the IRCJ-support cases The IRCJ began its operation in May 2003 andsupported 41 companies from Aug. 2003 to
Dec. 2004.
 I focus on major 9 cases including Kyushu
Industrial Transportation, Dia Kensetsu, Mitsui
Mining, Kimmon Manufacturing, Kanebo,
Taiho Industries, Daikyo, The Daiei, andMisawa Homes HD.

12

Main-bank share of burdens: the IRCJ-support cases
Figure 4: Main bank burdens in the IRCJ-support cases
Main bank share of burdens
100%
Dia Construction

80%
DaikyoMisawa Homes HD

60%
Mitsui MiningCompany
Daiei
Kanebo40%

Kinmon Manufacturing
Taiho Industries

20%
Kyushu Industrial Transportation

Main bank share of borrwowing
0%
0%

10%

20%

30%

40%
IRCJ-support cases (9 cases)

50%

60%
45 degree line

70%

80%

90%

13
13

Determinants of MB share of burdens
Dependent Variable: MB share of burdens
The Ordinary Cases
All cases

Guide Line cases

The IRCJ-support
Cases

constant

0.508***(8.068)0.422**(4.896)

0.039(0.413)

MB share ofborrowing

0.536***(3.767)0.617**(3.830)1.026***(5.235)# of obs.

39

5

9

Note) t-value in parenthesis. *** for 1％, ** for 5%, * for 10%
14

Who bears burdens more?:
Two possiblities(1) The IRCJ substantially subsidize the company andits non-main lenders by fixing the price of debts fornon-main lenders extremely high.
Æ In this case, the IRCJ suffers from substantial ex post
losses.
 (2) Small non-main lenders bears proportionalburdens of debt forgiveness through the ‘appropriate
purchasing price’ by the IRCJ.
Æ In this case, the IRCJ does not suffer from any ex
post losses.
15

Burdens on Non-main lenders and the IRCJ
million yen

Burdens of non-main banks Debt forgiveness + DES by IRCJ Debt forgiveness by IRCJ

160,000
140,000
120,000
100,000
80,00060,00040,00020,0000
KyushuDia Kensetsu Mitsui Mining Kimmon
Industrial
Company Manufacturing
Transportation

KaneboTaiho
Industries

DaikyoDaiei

Misawa Homes
Holdings

16

16

Profit on sales from equity participationby the IRCJ
Unit: million yen

EquityParticipation fromIRCJ (DES)

Proceed fromsales of share[Sponsor]

IRCJ’s profit on sales(rate of returns)

Kyushu Ind.
Transportation

700
(350)

3,194
[HIS]

2,494
(356%)

Mitsui Mining

20,000(20,000)

27,437[Nippon Steal]

7,437
(37%)

Kimmon Mfg.

3,000
(0)

4,650
[Yamatake Co.]

1,650
(55%)

Kanebo(Cosmetics)

236,000(150,000)

263,401[Kao]

27,401(11%)

Taiho Ind.

850
(850)

1,631
[Ichinen Co.]

781
(92%)

The Daiei

50,000(40,000)

69,800[Marubeni Co.]

19,800(40%)

17Summary: Burdens of debt forgiveness
Large excess burdens of main-bank are observed in
the ordinary cases for large Japanese companies
during 1998-2005.
 However, excess burdens of main-bank suddenly
disappeared in the IRCJ-support cases.
 IRCJ bore no ex post losses through purchasing andselling debts of supported companies. IRCJ neversubsidized supported companies and their lenders.
 The IRCJ greatly mitigated the main-bank’s burdensof debt forgiveness by successfully introducing newrule for proportional allocation of burdens.
Î The IRCJ-support could have large positive impacts
on performance of Japanese banking sector andresolution of debt-overhang problem
18

Hypothesis:
Impacts on MB equity price (1) Under the circumstances that capitals for mostof major Japanese banks are heavily impaired,given the excess burdens on the main-bank in
the resolution of debt-overhang problem,
market participants may perceive a request ofdebt forgiveness by a debt-ridden client as
negative news on its main-bank valuation.
 In this case, we would observe significant
negative impacts on equity price of main-bankwhen debt forgiveness announcement.
19

Hypothesis:
Impacts on MB equity price (2) If the company announces a request of debt

forgiveness under the IRCJ-support, the IRCJ
would apply the proportional burdens of debt
forgiveness to all lenders, and excess burdensof main-banks would be greatly mitigated.
 Market participants perceive a request of debt
forgiveness with support from the IRCJ as
positive news on its main-bank’s valuation.
 In this case, we would observe significant
positive impacts on equity price of main-bankwhen debt forgiveness announcement.
20

Identifying event days
(1) “First news report” on the request of debt
forgiveness for the ordinary cases, and support fromthe IRCJ for the IRCJ-support cases.
Æ The day when news report on possibility of debt
forgiveness of the company with or without support
from IRCJ was released to the market participants forthe first time.
(2) “Formal announcement of the plan” with or without
support from the IRCJÆ The day when the company formally announced its
corporate revitalization plan including the request ofdebt forgiveness for its lenders. For the IRCJ-support
cases, this is also the day when IRCJ formallyannounced the name of company to be supported.
21

Measuring Abnormal Returns ofMain-bank equity price (1) Regressing the standard market model:

Rijt = αij+βijRmt+ΣeΣkγijk,eDik,e+εijt(2)

Rit： Daily return of Main-bank i
Rmt： Daily return of TOPIX
e： event related to Main-bank i for firm j
k: Event window, [-1, +1]
22

Measuring Abnormal Returns ofMain-bank equity price (2)Estimation period includes 150 trading days before
the first event day and 40 trading days after thesecond event day. （Ongena, et al., 2003, Brewer III,et al., 2003)
 Estimated coefficients, γik,e, measure the daily
abnormal returns, ARs, inside the event window.
 Single day abnormal return is AR[0], and sum of
γik,e over the multiple event windows yield
cumulative abnormal returns, CAR[-1,0] andCAR[0,1].
23

-0.1000
Arai-Gumi

Chronological order of the formal annoucement of debt forgivenessMitsui Mining

24

Misawa Homes HD(2)Daiei(2)Daikyo(2)Taiho Industries

KaneboKimmon Manufacturing

2003-2004 cases

Dia Kensetsu

Kyushu Industrial

Sojitz HD

Mitsubishi Motors

Sata Construction

Sampei Construction

Nakano Corporation

SuzutanNissan Diesel

Toyo Construction

Tobishima

Kumagai-Gumi(2)ChoriSeibu Department

Tomen(2)Towa Real Estate(2)Kenwood

Nippon Yakin Kogyo

First news report

Isuzu Motors

Daikyo(1)Sumitomo Construction

Toyo Shutter

Misawa Homes(1)Iwataya

Haseko(2)Abnormal Returns (AR[0])Daiei(1)

Mitsui Construction

Daisue Construction

Kumagai-Gumi(1)HazamaTomen(1)Kanematsu

Chuo Paperboard

Pasco

Sato Kogyou

Towa Real Estate(1)Shokusan Jutaku Sogo

FujitaHaseko(1)Aoki Corporation

Single day abnormal return, AR[0], for each case
Figure 5: Main bank's Abnormal returns at the event day of announcement of debt forgivenessFormal announcement of the plan
IRCJ-support cases

0.10000.05000.0000-0.0500

Simple mean test of each sample
 Simple mean test (MacKinley,1997) tojudge the significance of sample average
under the assumption that the estimates
are independent across events.
 Sample groups are “the IRCJ-support
cases” and “the ordinary cases”.

25

Simple mean test: “IRCJ-support ” and “Ordinary” cases
Table 6: Average (cumulative) abnormal returns of main banks across evenrs(A) Average (C)ARs of main-banks across events (both of first news report and formal announcement of the plan
Number of Events
AR[0]
CAR[-1,0]
CAR[0,1]
IRCJ-support cases(9 cases)

15

0.027***(0.000)0.036***(0.000)0.033***(0.019)Ordinary cases(39 cases)

53-0.009**(0.022)-0.001(0.864)0.001(0.805)

2003-2004 ordinary cases(12 cases)

18-0.011(0.218)0.001(0.946)0.0190(0.201)(B) Average (C)ARs of main-banks across events (either first news report or fomal announcement of the plan)
Number of Events
AR[0]
CAR[-1,0]
CAR[0,1]
IRCJ-support cases(9 cases)

90.028**(0.026)0.028**(0.022)0.028(0.179)Ordinary cases(39 cases)

39-0.014***(0.000)-0.007(0.422)-0.007(0.247)26※ p-values are reported in parentheses. *** 1%, ** 5%, * 10%26

Cross-sectional Regressions
 Regressing (C)AR of Main-bank i forfirm j on characteristics of each case
 Estimated equation:(C)ARij = α+β(Forgive/MBCAP)ij+γ(Firm(C)AR*ShareMV/MBCAP)ij+σ1Largestij + σ2Limitij+σ3Presidentij+δIRCJij
27

Sample summary (1): Direct impacts
IRCJ-support cases

Ordinary cases(A) Debt forgivenessMean
Maximum(Median) (Minimum)

Std.Dev.

Maximum
Mean(Minimum Std.Dev.
(Median))

0.0468(0.0223)0.2216(0.0001)

0.06960.0393(0.0154)0.1758(0.0012)0.0523Firm AR[0] * Market valueof firm equity holdings / MB
capitalization-0.0000('0.0000)

0.0000(-0.0001)

0.00000.0000(0.0000)

0.0010(-0.0017)

0.0003Firm CAR[-1,0] * Market
value of firm equity holdings/ MB capitalization-0.0000(0.0000)

0.0000(-0.0001)

0.0000-0.0003(0.0000)

0.0014(-0.0133)

0.0021

Firm CAR[0,1] * Market
value of firm equity holdings/ MB capitalization-0.0000(0.0000)

0.0001(-0.0002)

0.0000-0.0007(0.000)0.0007(-0.0288)

0.0046

Proportional Burdens of Debt
Forgiveness / MB
capitalization(B) Firm's abnormal returns

28Sample summary (2): MB relationship
IRCJ-support cases

Ordinary cases

Mean# of cases % to total(Median)

Mean
Percent to# of cases(Median)total% of equity held by MB

3.31(4.19)--

4.38(4.79)--

MB top equity holder
among outsiders

-

5

56%

-

20

51%

MB equity holding at legal
limit

-

2

22%

-

13

33%

MB representation on
board

-

8

89%

-

36

92%

MB representation on
President (or Chairman)

-

2

22%

-

11

28%

(C) Main bank relationship29

Cross-sectional regressions: All events
AR[0]Dependet variable

0.001 -0.000(0.830) (0.903)

Constant
Proportional Share ofdebt forgiveness/M BCAP
Firm (C)AR *ShareM V/ M BCAP

CAR[-1,0]0.000(0.997)0.021*(0.067)0.016*(0.087)

CAR[0,1]
0.017(0.115)0.021* 0.013 0.018*(0.054) (0.147) (0.087)-0.169**-0.146** -0.149**-0.272** -0.211* -0.213*-0.270** -0.223* -0.240**(0.014) (0.027)(0.027)(0.033)(0.080)(0.082)(0.025) (0.055) (0.042)

2.917

4.312

4.307

3.623

3.435

3.480

1.064

(0.798) (0.700)(0.702)(0.364)(0.382)(0.381)(0.551) (0.627) (0.582)-0.010-0.026*-0.019(0.156)(0.061)(0.142)

0.876

0.997

Largest shareholder-0.001-0.001-0.013(0.803)(0.893)(0.345)-0.014* -0.014*-0.034** -0.034**-0.010(0.076)(0.022)(0.025)(0.489) (0.567)

0.041***0.039*** 0.039***0.043*** 0.037** 0.037**

0.036** 0.033** 0.033**(0.000) (0.000)(0.000)(0.008)(0.018)(0.019)(0.018) (0.030) (0.033)

0.257

0.315

0.113

0.137

0.124

0.090

Legal limit

President

IRCJ

Adj-R-sq.

0.271(0.085)0.065-0.0080.064

30※ p-values are reported in parentheses. *** 1%, ** 5%, * 10%30

Cross-sectional regressions: Alternative samples

C o n s ta n t te rm

irs t n e w s re p o r t o r f o r m a l a n n o u n c e m e n
A R [0 ]2 0 0 3 -2 0 0 4 c a se s
A R [0 ]S a m p le
D e p e n d e t v a r ia b le0 .0 0 3-0 .0 0 0

- 0 .0 0 0

0 .0 0 2-0 .0 0 8

-0 .0 0 7

- 0 .0 0 6-0 .0 0 5

(0 .7 1 9 )( 0 .9 6 9 )(0 .9 5 5 )( 0 .7 8 7 )(0 .2 2 4 )( 0 .2 1 7 )(0 .2 1 1 )( 0 .3 6 6 )P r o p o r tio n a l s h a re o f
d e b t f o r g iv e n e s s / M B
c a p ita liz a tio n-0 .2 3 0 * * - 0 .2 1 2 * * - 0 .1 9 3 * - 0 .2 2 2 * *- 0 .1 4 8 * - 0 .1 5 1 * * -0 .1 4 4 * * - 0 .1 4 8 * *(0 .0 3 6 )( 0 .0 4 1 )(0 .0 5 4 )( 0 .0 3 0 )(0 .0 5 0 )( 0 .0 4 3 )(0 .0 4 9 )( 0 .0 4 6 )F ir m A R * M B e q u ity
h o ld in g s / M B
c a p ita liz a tio n

2 2 .7 4 8

3 7 .2 4 5

3 7 .7 2 4

1 9 .2 5 5

1 3 .9 0 3

1 3 .9 7 5

1 4 .0 7 9

1 3 .8 8 2(0 .7 7 0 )( 0 .6 1 3 )(0 .6 0 5 )( 0 .7 9 2 )(0 .2 6 1 )( 0 .2 5 3 )(0 .2 4 5 )( 0 .2 5 6 )L a rg e s t s h a re h o ld e r-0 .0 2 0

-0 .0 0 1

(0 .1 2 1 )(0 .8 1 3 )L e g a l lim it-0 .0 2 5 *-0 .0 1 9-0 .0 0 5

-0 .0 0 4

( 0 .0 8 2 )( 0 .1 8 1 )( 0 .4 8 5 )( 0 .6 1 9 )P r e s id e n t

IR C JA d j-R -s q .

- 0 .0 2 7 *-0 .0 2 2

- 0 .0 0 9-0 .0 0 8

(0 .0 6 4 )( 0 .1 4 1 )(0 .2 7 7 )( 0 .3 3 6 )0 .0 4 7 * * * 0 .0 4 6 * * * 0 .0 4 4 * * * 0 .0 4 7 * * *(0 .0 0 0 ) ( 0 .0 0 0 ) (0 .0 0 0 ) ( 0 .0 0 0 )0 .3 2 4

0 .3 3 9

0 .3 4 8

0 .3 6 80 .0 4 4 * * * 0 .0 4 4 * * * 0 .0 4 4 * * * 0 .0 4 3 * * *(0 .0 0 0 ) ( 0 .0 0 0 ) (0 .0 0 0 ) ( 0 .0 0 0 )0 .3 0 1

0 .3 0 9

0 .3 2 0

0 .3 0 831※ p-values are reported in parentheses. *** 1%, ** 5%, * 10%31

Conclusion
 IRCJ successfully introduced new rule for

proportional share of burdens among lenders.
 The IRCJ bore no ex post losses throughpurchasing and selling debts of supported
companies. The IRCJ never subsidized
supported companies and their lenders.
 Under the IRCJ scheme, debt forgivenessannouncement had positive impact on thevaluation of the main-banks.
32

Implication
Main-bank’s excess burdens disappeared when IRCJ
introduced new rule of proportional burdens of debt
forgiveness.
 Under the IRCJ scheme, debt-overhang problem forthe symbolic debt-ridden companies were resolved
and performance of the Japanese banking sector were
improved.
 Results strongly suggest that too large excess burden
on the main-bank under the traditional Japanese
main-bank system was an important contributor to
prolonged NPL problem in Japan.
33

Figure 2: Cumulative Abnormal Returns of Japanese Banking Sector (From July 1, 2002 to March 31, 2005)
CAR (benchmarck:TOPIX）

CAR of Topix Banks ETF (TSE, code:1615)

0.45
Annoucement of the first firms
under the IRCJ supports(Aug.28,2003)

0.35

0.25

Anti-Deflation Package andFinancial Revitalization
Program (Oct.30,2002)

Daiei and Misawa announced to
be under the IRCJ supports(Dec.28, 2004)

IRCJ began its operations(May 8,2003)

0.15

0.05

-0.05

-0.15

20
02
07
20 01
02
07
20 30
02
08
20 28
02
09
20 30
02
10
20 30
02
11
20 29
03
01
20 06
03
02
20 05
03
03
20 07
03
04
20 08
03
05
20 09
03
06
20 09
03
07
20 08
03
08
20 07
03
09
20 05
03
10
20 08
03
11
20 10
03
12
20 10
04
01
20 15
04
02
20 16
04
03
20 16
04
04
20 14
04
05
20 19
04
06
20 17
04
07
20 16
04
08
20 17
04
09
20 15
04
10
20 19
04
11
20 18
04
12
20 20
05
01
20 24
05
02
20 23
05
03
25

-0.25

Trading day

34
34

Further Research Sample bias in the IRCJ-support cases

 Stock price reaction of non-main lenders Assessment of the debt forgiveness in the Post-

IRCJ era

35

Reduction of equity for the IRCJ-support firms
Kyushu Industrial Transportation 100% (Kyushu Sanko)
Dia Kensetsu

99%

Mitsui Mining Company

91.1%

Kimmon Manufacturing

90%

Kanebo99.7%

Taiho Industries

95%

Daikyo99.2%

The Daiei

99.6%

Misawa Homes HD

99%36