Imagine being the first among your peers to invest in a failing institution in a foreign land reputed for its nationalism and hostility toward to outside investors. That was exactly the risk that New York-based Ripplewood Holdings took when, in 2000, it led an investor group to acquire and rehabilitate Japan’s all-but-collapsed Long-Term Credit Bank (LTCB)-later known as Shinsei Bank. At the time, no foreign firm had ever gained control of a major Japanese financial institution. Today, the investment stands a chance of being one of the most profitable private equity transactions in history, giving its financial backers the possibility of a 12x return on the their investment.
LTCB, like many other Japanese banks, overextended its real-estate financing during Japan’s 1980s bubble economy. When the bubble burst, the bank was left with a mountain of bad loans. By fiscal year 1998, the bank reported an unconsolidated pretax loss of about 1.6 trillion (more than $15 billion). In October of that year, LTCB was temporarily nationalized, cleaned up a bit by the government and put on the auction block.
Ripplewood was first reported on the scene in May 1999. The firm had assembled a heavy hitting international investment consortium reported to include AIG, Citigroup, GE Capital, Mellon Financial Corp., UBS, ABN AMRO, Banco Santander and Deutsche Bank. Though Ripplewood did the steering, the sizes of the individual stakes have not been disclosed.
Ripplewood’s most meaningful competition came from a duo of local Japanese banks-Chuo Trust & Banking Co. and Mitsui Trust & Banking Co.-whose home-court advantage, coupled with Japan’s history of keeping its businesses under local control, reportedly had them in the lead for much of the Goldman Sachs-run auction. But the pair reportedly fell out of favor in part because they were planning to lay off much of the bank’s staff.
LTCB was awarded to Ripplewood in September 1999. Under terms of the transaction, which closed in March 2000, the buyers paid a token 1 billion ($9.46 million) for LTCB’s existing common shares and injected an additional 120 billion (approximately $1 billion) to fund the bank’s recapitalization.
Looking for a complete 180-degree turn, the first order of Ripplewood’s business was to rename the bank. They came up “Shinsei,” which means “rebirth” or “new life.” To make the name stick, Ripplewood gave Shinsei a new heart and soul by tapping Citibank NA veteran Masamoto Yashiro. Under Ripplewood’s umbrella, Yashiro worked to strengthen the bank’s earning power and improve its financial state by focusing on investment banking and retail operations.
But the path to Shinsei’s revival was not totally smooth. When Ripplewood took advantage of the government’s offer to purchase bad loans whose market value dropped more than 20%, many taxpayers were upset, and the move spurred political debates aimed at curbing such state-led leniencies that, in the opposition’s view, stole money form the Japanese public and handed it to foreign interests. The flagship of these unpopular buybacks occurred in July 2000, when the government agreed to purchase about half of the $1.9 billion in bad loans that ailing Japanese retail chain Sogo borrowed from the bank.
But as the Ripplewood team worked hard to maneuver Shinsei into the black, its efforts commanded the public’s praise. The bank announced a net profit of 61.2 billion and a bad-loan ratio of 20.8% for the fiscal year ending March 2002. A year later it reported a net profit of 53 billion and a slashed bad-loan ratio of 5.7 percent.
Shinsei became known for its aggressive business style that was worlds apart from Japan’s traditionally warm bank/client relationships. After purging many of its bad loans, Shinsei focused sharply on boosting its fee income, and shifted its business model from underwriting traditional loans to signing up more retail clients, which buy more sophisticated structured loans that spread risk while boosting profitability. And like other large banks, Shinsei moved into investment banking, turnarounds and set up a corporate rehabilitation team. The bank was also outfitted with the Shinsei Investment Management Co., an asset management firm focused on Japan’s middle class. And to top it all off, some of Shinsei branches were outfitted with their own, built-in Starbucks.
On Feb. 19, 2004, Shinsei became the first bank in Japan’s history to be re-listed on the Tokyo Stock Exchange after collapsing and being revived by its new owners. The Ripplewood-led consortium floated about half of its 67% stake in the bank at an issue price of 525 a share. The group’s total take on the IPO was about $2.3 billion, twice its original investment. By the end of the first day of trading, Shinsei’s shares were trading at 827, a 58% premium on the offering price.
Today, the Ripplewood-led group is on the road and looking to sell another, and more valuable, stake in Shinsei Bank, said a source close to the process. This time, the consortium is looking to sell shares totaling $2.8 billion. Citing SEC regulations, Ripplewood declined to comment for this story. In all, the investment consortium’s remaining stake in Shinsei is reportedly worth between $5 billion and $6 billion.
At the post-listing briefing last February, according to the Financial Times, Shinsei President Masamoto Yashiro, summed up the turnaround in a single metaphor: “Three years ago, it was muddy water. Two years ago it was light brown. This year, you can see the bottom of the pond.”
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