December 2022
No.A&S_019

So far in 2022, Atsumi & Sakai has held seminars on some 25 themes for Japanese financial institutions.
Following the seminars, we are publishing a series practice notes discussing some of the topics coveredthat may be useful for overseas readers. In this edition, we outline a lecture that explores the trends insyndicated loans in Japan and related regulations under Japanese law.

Trends in Syndicated Loans andRelated Regulations in Japan
1. Trends in syndicated loans
The value of syndicated loans in Japan has been increasing in much the same way as in other countries.
For borrowers, syndicated loans are large and flexible funding vehicles, and for lenders it is a business witha controlled credit risk, and which generates a high loan margin income. For financial institutions in Japan,
where the Bank of Japan’s long-term low interest rate and easy monetary policy creates an unprofitableenvironment, overseas business centered on the U.S. syndicated loan markets, which generates a large feepool, is an important source of income and it was recently reported that the number of syndicated loansmanaged by Japanese financial institutions to U.S. corporations in 2021 was approximately three times
that of 10 years earlier.
On the other hand, transactions in foreign currency markets in Japan are rare, and it remains difficult forJapanese banks to procure stable USD and other foreign currencies. In order to strengthen the profitabilityof Japanese banks, it is desirable for them to attract foreign financial institutions to participate insyndicated loans originated in Japan denominated in foreign currencies. To that end, it was reported atthe end of last year that Japan’s Financial Services Agency had started to consider allowing foreign banks
without a Japanese banking license, etc. to participate in syndicated loans originated in Japan.

2. Approvals and licenses required for foreign banks to participate in Japanesesyndicated loans
Currently, for a foreign bank to participate in syndicated loans with a Japanese borrower on a primarybasis it must:(i) Obtain a license under Article 47, Paragraph 1 of the Banking Act; or(ii) Register as a money lending business pursuant to the Money Lending Business Act; or(iii) Entrust the business to a Japanese bank that engages in foreign bank agency services (the foreign bankbeing a “principal foreign bank”) pursuant to Article 52-2-4 of the Banking Act,(i) and (ii) requiring a local office.
A foreign bank can participate in a syndicated loan to a Japanese corporation based on (i) – (iii) as follows:1©Atsumi & Sakai 2022

December 2022
No. A&S_019

In the case of (i), only the local offices of foreign banks with an Article 47 license are deemed to be Japanesebanks and can participate in syndicated loans for Japanese borrowers, and it is a breach of the Banking
Act for the foreign bank to participate in syndicated loans to Japanese borrowers from a foreign office.
In the case of (ii), since the registration as a money lending business should be made on the premise thatthe entity conducting the money lending business has its own business office in Japan, it is a breach of theMoney Lending Business Act for a foreign financial institution with a local office registered as amoneylender to participate in syndicated loans to Japanese borrowers from a foreign office.
In the case of (iii), it is possible for the foreign bank registered under the Banking Act as a principal foreignbank to participate in a syndicated loan from a foreign office on the condition that a Japanese bankperforms foreign bank agency services as an intermediary in the syndicated loan transaction. It should be
noted that if the principal foreign bank as a participant in the syndicated loan transaction is involved in
the conduct of the intermediary, it may, depending on the degree of such involvement, violate the Banking
Act.

3. Caps on fees and interest rates
In Japan, the Act Regulating the Receipt of Contributions, Receipt of Deposits and Interest Rates(“Contributions, etc. Act”) and the Interest Rate Restriction Law impose limits on the fees and interest thatcan be received or charged by financial institutions, the current interest rate cap being 15%-20% of theborrowed amount. These regulations apply domestically to both consumer and corporate loans andregardless of currency, so care needs to be taken with loans denominated in foreign currencies as theinterest rates on foreign currencies are generally significantly higher than those for Japanese yen and there
is a higher risk of breaching the interest rate cap in a foreign currency loan. The cap covers both statedinterest and certain fees and charges that would be regarded as “deemed interest”.
(1) Arrangement Fees
The Contributions, etc. Act provides that “No person acting as an intermediary in the lending or borrowingof money shall enter into a contract for a fee in excess of 5% of the amount of the loan to the intermediaryor receive a fee in excess of this.”.
While it is a matter of debate whether a person is a “person acting as an intermediary for the lending ofmoney” where it assists in the arrangements for a loan but the loan is ultimately not agreed, in practice, it
is considered safer to receive arrangement fees only after the loan agreement is concluded.
The next issue is whether the arrangement fee can be received after the loan agreement has been concluded
but before a loan is advanced. In Japan, the traditional view had been that a loan contract becomes valid
only after the agreement to lend has been entered into and funds are advanced under it, so the arrangement
fee would only be payable after a loan has been advanced. However, a recent amendment to the law has
clarified that written loan agreements are valid without the funds being advanced, and the current view of
the issue is that once the loan agreement is concluded, it is deemed that the intermediary actions thatshould have been taken must have been completed and a financial institution as an arranger of a syndicatedloan can receive the arrangement fee before any loan is actually made.
When multiple arrangers are involved, the question arises whether each arranger can receive up to 5% or
the total paid to all arrangers is capped at 5%. It is customary to take a conservative view and apply the cap
to the aggregate arrangement fees for all arrangers.
Where a loan agreement is amended to increase the amount that can be borrowed, the 5% cap on thearrangement fees would apply to the additional loan amount.
(2) Deemed Interest - Arrangement Fees & Agent Fees
There is debate as to whether arrangement fees and agent fees constitute interest for the purpose of theInterest Rate Restriction Act, a common view being that they are not as they are simply a consideration forbusiness performed independently of the loan itself and not for the use of the principal, but the questionneeds to be considered based on the facts of each case.
(3) Deemed Interest - Commitment Fees & Facility Fees
2

©Atsumi & Sakai 2022

December 2022
No. A&S_019

The Act on Specified Commitment Line Contracts exempts commitment fees and facility fees received byfinancial institutions from the application of the Interest Rate Restriction Act when the borrower is a listedcompany subject to that Act. Therefore, if the borrower is not subject to the Act (such as a small andmedium-sized enterprise (“SME”)), commitment fees and facility fees received by the lender will bedeemed as interest under the Interest Rate Restriction Act. If a commitment fee or facility fee is charged
without the loan being extended, the effective interest rate would become infinite, which would violate theInterest Rate Restriction Act and the Contributions, etc. Act. In such cases, measures to mitigate the risk
should be taken which include (a) requiring the borrower to borrow a specified amount or (b) adjusting
the amount of the commitment fees and interest payable so as to lower the effective interest rate below thecapped rate.
(4) Deemed interest - Other Fees
Other fees that may be regarded as deemed interest include upfront fees, etc. such project structuring feesor administration fees, and monitoring fees for bilateral covenant financing.
A common criterion for distinguishing what is or is not deemed interest is “whether the business thatinvolves actual social and economic conditions is conducted so that the fees received can be evaluated ascompensation for a business that is independent of the loan”. However, this is not considered an objective
standard, and whilst the terms of the loan, etc. agreement are relevant each situation has to be examinedbased on its facts so it is difficult to exclude the possibility of such fees being treated as deemed interest
despite the terms of the loan documentation.

4. Security/Guarantees
One of the factors behind the rise of syndicated loans in Japan since the early 2000s was that thefundamental characteristics of syndicated loans, which monitor business conditions by setting covenants,
were consistent with Japan's challenge at that time to break away from the traditional approach ofproviding credit enhancement through security and guarantees.
However, when providing syndicated loans for SMEs, it is essential to consider providing credit
enhancement through security and guarantees and a considerable proportion of syndicated loans to SMEs
are still backed by security or guarantees.
When taking security or a guarantee, it is necessary to keep in mind that depending on the scope of thesecured claims, there may be a question of whether revolving or ordinary collateral or guarantees should
be taken. Typically, revolving collateral and/or revolving guarantees are used where secured claims arelikely to arise and be extinguished repeatedly, such as in the case of commitment lines, and for a specificsecured claim, such as a term loan, ordinary collateral and ordinary guarantees are used.
In Japan, guarantees provided by individual owners/managers of the borrower have traditionally beenviewed as contributing to the smooth procurement of corporate funds, though they can be seen to impede
management flexibility and have a negative impact on business succession. For revolving guarantees byindividuals, rules have recently been introduced through legislation and guidelines which may void
revolving personal guarantees and/or require certain formalities to be complied with. Therefore, financial
institutions must take more care than before when accepting revolving guarantees from individuals.
---------------------------------------------------------------------------------------------------------------------------THIS NEWSLETTER IS PROVIDED FOR INFORMATION ONLY; IT DOES NOT CONSISTUTE ANDSHOULD NOT BE RELIED UPON AS LEGAL ADVICE.
----------------------------------------------------------------------------------------------------------------------------3©Atsumi & Sakai 2022

December 2022
No. A&S_019

Authors/Contacts
Ryosuke OuePartner
E: ryosuke.oue@aplaw.jp

Sayaka Aizawa
Partner
E: sayaka.aizawa@aplaw.jp

If you would like to sign up for A&S Newsletters, please fill out the sign-up form.
Back issues of our newsletters are available here.

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

Atsumi & Sakai is a multi-award-winning, independent Tokyo law firm with a dynamic and innovative approach to legal
practice; it has been responsible for a number of ground-breaking financial deal structures and was the first Japanese law
firm to create a foreign law joint venture and so admit foreign lawyers as full partners. Expanding from its highly regarded
finance practice, the firm now acts for a wide range of international and domestic companies, banks, financial institutions
and other businesses, offering a comprehensive range of legal expertise.
Atsumi & Sakai has an outward-looking approach to its international practice, and has several foreign lawyers with extensive
experience from leading international law firms, so providing its clients with the benefit of both Japanese law expertise andreal international experience.
We are the only independent Japanese law firm which is located in New York, London and Frankfurt which together with
our Tokyo head office enables us to provide real-time advice on Japanese law to our clients globally.

Atsumi & Sakai
www.aplawjapan.com/en/
Tokyo Head Office: Fukoku Seimei Bldg., 2-2-2 Uchisaiwaicho, Chiyoda-ku, Tokyo 100-0011, JapanKojimachi Office: Tower Kojimachi (4th and 7th Floor), 9-10 Nibancho,Chiyoda-ku, Tokyo 102-0084 Japan
Fukuoka Affiliate Office: Tenjin Bldg. 10F, 2-12-1 Tenjin, Chuo-ku, Fukuoka-shi, Fukuoka 810-0001 JapanNew York Affiliate Office: 1120 Avenue of the Americas, 4th Floor, New York, New York 10036London Office: 4th Floor, 50 Mark Lane, London EC3R 7QR, United KingdomFrankfurt Affiliate Office: OpernTurm (13F) Bockenheimer Landstraße 2-4, 60306 Frankfurt am Main, Germany

NOTICES
1. ABOUT ATSUMI & SAKAI
Atsumi & Sakai is a partnership consisting of Atsumi & Sakai Legal Professional Corporation, a Japanese professional corporation, a foreign law joint venture underthe Act on Special Measures Concerning the Handling of Legal Services by Foreign Lawyers with certain Registered Foreign Lawyers of our firm, a Japanese Civil Codepartnership among Japanese lawyers, represented by Yutaka Sakai, a lawyer admitted in Japan, and a foreign law joint venture with Janssen Foreign Law Office,represented by Markus Janssen, a foreign lawyer registered in Japan to advise on the laws of the Federal Republic of Germany. In addition to lawyers admitted inJapan, our firm includes foreign lawyers registered in Japan to advise on the laws of the US States of New York and California, the People’s Republic of China, India,
England and Wales, and the State of Queensland, Australia. Foreign lawyers registered in Japan to advise on state laws also are qualified to provide advice in Japan on
the federal laws of their respective jurisdictions.
Atsumi & Sakai has established an office in London operating as Atsumi & Sakai Europe Limited (a company incorporated in England and Wales (No: 09389892); sole
director Naoki Kanehisa, a lawyer admitted in Japan), and has established an affiliate office in New York operating as Atsumi & Sakai New York LLP (a limited liabilitypartnership established in New York; managing partner Bonnie L. Dixon, a lawyer admitted in New York and a Registered Foreign Lawyer in Japan). We also havea partnership with A&S Fukuoka LPC in Japan (partner: Yasuhiro Usui, a lawyer admitted in Japan) and an affiliate office in Frankfurt operating as Atsumi & Sakai
Europa GmbH - Rechtsanwälte und Steuerberater, a corporation registered in Germany providing legal and tax advisory services (local managing directors: FrankBecker, a lawyer, and Miyuki Hanaoka a tax advisor, both admitted in the Federal Republic of Germany)
2. LEGAL ADVICEJapanese legal advice provided by Atsumi & Sakai and our global offices is provided by lawyers admitted in Japan. Advice provided in Tokyo in respect of any foreign
law on which one of our foreign lawyers is registered in Japan to advise, may be provided by such a Registered Foreign Lawyer. None of Atsumi & Sakai Legal
Professional Corporation, Atsumi & Sakai Europe Limited or Mr. Naoki Kanehisa is regulated by the Solicitors Regulation Authority for England and Wales, and nonewill undertake any reserved legal activity as defined in the United Kingdom Legal Services Act 2007. Advice provided in Germany on the laws of Germany will beprovided by a lawyer admitted in Germany, and advice provided in New York on the laws of New York will be provided by a lawyer admitted in New York.

4©Atsumi & Sakai 2022