Loan Sharks Thrown A Life Belt

[Mulboyne]

[floatl][/floatl]Reuters: Japan may backtrack on lending regulations
Japan will consider reversing its tightening of regulations on moneylenders to help self-employed business owners following the financial crisis, the Nikkei business daily said on Sunday. The government will launch as early as this month a study group in which ministers and other officials from related entities including the Financial Services Agency will reassess impending changes, with stricter rules on consumer lenders set to be implemented by June 2010, the Nikkei said. Japanese moneylenders such as Aiful Corp offer unsecured personal loans mainly to borrowers with weak credit. The leaders will discuss the appropriateness of limiting unsecured loans to one-third of annual income, as well as whether the government should take steps to mitigate any adverse impact of tightened regulations, the paper said. It added, citing data from the Japan Financial Services Association, that more than 50 percent of people who have outstanding loans from consumer finance companies are carrying more than one-third their annual income in such debt. Among the impending changes, the maximum interest rate is set to be lowered to 20 percent from 29.2 percent, the Nikkei said. 'We will not rule out the possibility of freezing the implementation of the tightened regulations,' the paper quoted a government source as saying.

Related FG Thread: Sarakin On The Retreat

[Mulboyne]

Still some major wrinkles:

Reuters: Aiful loan payment miss may roil Japanese CDS market

Efforts to turn around Japanese consumer lender Aiful Corp are raising new complications relating to credit default swaps in Japan, which some market participants say could have a wide-ranging impact on use of the contracts in the country. Aiful, Japan's second-largest consumer lender by assets, has missed payments due on its loans, and its lenders have been unable to trigger payments on credit default swaps protecting the debt because the company has not publicly disclosed the missed payments, sources said. Holders of CDSs are now concerned that future instances in which distressed companies miss debt payments could lead to similar frustrations in obtaining payments for debt protection. That in turn would devalue CDSs and could roil bank lending in Japan.

Aiful said in September said it would seek to enter into what's known as an Alternative Dispute Resolution process, to turn around its business. As part of the process, the company said it would ask creditors to push back repayments on $3 billion of debt. Since then, the company has failed to make multiple loan payments worth several billions of dollars that were due in September, said people familiar with the matter. At a meeting with lenders in October, the company gave out documents that said it was undergoing the ADR process and listed a number of loan payments it would not make, the sources said. Aiful spokesman Kenichi Hashimoto declined to comment.

Bank lenders, at least some of whom also hold credit default swaps protecting the debt, are expected to take losses from the debt negotiations. Payments on a credit default swap are triggered when a borrower misses an interest or principal payment due on its debt. But Aiful's lenders have been unable to collect on the credit default swaps because there are no public documents that show Aiful has missed the payments, the sources said. The decision to trigger credit default swaps is determined by an industry committee, which relies on public information. Net volume of around $1.36 billion are outstanding on credit default swaps insuring Aiful's debt, according to data from the Depository Trust & Clearing Corp.

LACK OF DISCLOSURE

The lack of public information regarding the missed interest payments has raised concerns over a culture in Japan that differs from most countries in not requiring companies to announce such missed milestones. Aiful is thought to be the first company in which the lack of public information has created an issue relating to CDSs. The impact could be widely felt, however. If lenders are unable to get paid on CDS hedges, they may be less likely to lend to companies, which could have wide-ranging ramifications for corporate liquidity, market participants said.

Aiful has continued to make payments on its bonds at their full value, however, which effectively elevates the debt above the company's loans, reversing the traditional capital structure in which loan holders have a higher priority on claims. This could make it unattractive for banks and other investors to extend loans in the future.