Sat, Jan 19, 2002 page19

• Analysts agree bail-out of Daiei is the better of two evils

  Pundits say creditor banks should also share the blame because of their inability to assess the company's deterioration and issuing loans that didn't match the risks involved

  • AFP
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  Creditor banks for troubled Japanese retailer Daiei Inc made the right decision by granting a massive aid package to help the supermarket chain out of a desperate financial situation, analysts said yesterday.

  "If Daiei was allowed to fail, that would mean all of its loans would be cancelled -- a sure way to push creditor banks under because of their large exposure to Daiei," said Yoshio Kumano, professor emeritus of Senshu University, in Tokyo.

  "I suppose you can say this is a case of a `too-big-to-fail' scenario," he said. "What they need to do now is to make sure whoever are responsible for this mess are held responsible. Otherwise, similar cases would happen again."

  

  Japanese customers enjoy shopping at a Tokyo store of Japan's largest supermarket chain, Daiei. The troubled company have announced a three-year business rehabilitation program.

  PHOTO: AFP

  Daiei said yesterday it would receive a ?420 billion (US$3.2 billion) bailout from main creditor banks in a desperate bid to salvage its business.

  The life-line, to be extended by UFJ Holdings Inc, Sumitomo Mitsui Banking Corp and Fuji Bank Ltd, would include ?300 billion in a debt-for-equity swap and a debt waiver.

  The banks will also dispose of ?120 billion worth of preferred shares bought from the troubled retailer last year.

  In return, Daiei pledged to implement a drastic shake-up of operations that include cutting its core workforce by 1,000 and a further 5,000 at group firms as well as shutting more than 50 unprofitable stores.

  Analysts said the banks had no choice but to help Daiei to offset an economic crisis in Japan.

  "Daiei employes 100,000 people. If they all became unemployed, it would have significant impacts on Japan's unemployment situation, which is already at a post-war high," said Takeshi Otsuka, retail analyst at Toyo Securities.

  "From the banks' view, Daiei has ?2.3 trillion in loans. Daiei's failure would mean all the loans would turn sour on an unprecedented scale in Japan," he said. "It would throw a major blow to the financial health of banks."

  Daiei's lenders are caught between a rock and a hard place but they would benefit more in the long term by supporting the retailer to ensure they receive some return on their loans, said Toshihiro Ishijima, banking analyst at Tsubasa Research Institute.

  "Banks have been struggling to deal with their non-performing loan problem. I think it would be wiser to support Daiei fully to prevent its loans from turning sour," Ishijima said.

  Toyo Securities' Otsuka thought the restructuring plan would bear fruit.

  "I am somewhat optimistic about Daiei's future," he said. "An important issue here is for Daiei to increase its cash flow, and I think the company is capable of doing that.

  "If Daiei dumps loss-making assets, including discount stores, it might be able to recover."

  But Kumano from Senshu University said in theory, Daiei and its creditor banks should have been left to go bust "if Japan as a nation wanted to deal with the Daiei problem thoroughly."

  "Then, the government can throw in financial packages to help the banks restructure themselves, maybe holding them under national ownership temporarily," he said.

  Daiei fell into crisis after its founder Isao Nakauchi -- once hailed as a charismatic business leader -- diversified the retailer's operations from supermarkets to hotels and clothes outlets, but failed to maintain their financial health, analysts said.

  The creditor banks should also share the blame because of their inability to assess Daiei's deterioration, issuing loans that didn't match the risks involved, they said.

  "This whole thing is basically a result of banks' nonsense lending to Nakauchi's nonsense management," Kumano said. "Daiei became arrogant after enjoying earlier successes."

  Ishijima warned similar scenarios in future -- with banks forgiving debts to companies -- would increase as Japan's economic slump deepens.

  "Especially in the currently weak construction, real-estate and retail sectors, I expect similar cases will happen in the near future," he said.
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