The Japan Syndication and Loan-Trading Association (JSLA) is spearheading an initiative to create market conditions in Japan akin to the U.S. and Europe and encourage far greater international involvement. "Our main purpose is to develop standardized documentation, develop rules for the market and change the whole tradition of Japanese banking," stated Shusaku Minoda, chairman of the JSLA and general manager of syndicated finance and loan trading at Mizuho Corporate Bank in Tokyo. "We aim to create the same kind of market as in the U.S. and Europe," he said. "We are encouraging the international banks to come to the Japanese market and play a larger role."
This would be a massive leap for a market that is considered by many to be isolated and concentrated among Japan's three largest banks. In 2004 more than 95% percent of Japan's approximately $100 billion syndicated loan business was done by Mizuho, Sumitomo Mitsui Banking Corp. and Bank of Tokyo Mitsubishi. Citigroup followed in a distant fourth with only a handful of deals. Japanese banks have historically wrestled with mounds of nonperforming loans.
The Japanese banks are looking to diversify risk through greater syndication of loans and expanded loan trading. A secondary trading market has begun to develop. For the industry to expand further it must break from the traditions of Shigarama, the special relationship between banks and borrower which often involves a complicated web of cross-ownership that blurred business and financial relationships. "For the market to reach its potential, the lenders have to change their mentality and break from tradition," stated Minoda, who sees the Japanese syndicated loan market reaching $1 trillion and loan trading reaching $100 billion within the next two-to-three years.
"I think that there is going to be a much more active secondary market for Japanese loans, maybe it starts much like the U.S. secondary loan market started, maybe it starts more on the distressed side," said Don Pollard, chairman of the Loan Syndication and Trading Association (LSTA) and global head of the syndicated loan group at Credit Suisse First Boston. "They have been selling portfolios of loans for a number of years. I think that what they are looking at now is more non-performing corporate loans that will look more like the secondary distressed market in the U.S. and Europe."
"Japanese banks need to diversify their risks, in the past we didn't have loan trading tools, just because we didn't do it in the past doesn't mean we won't do it in the future," concluded Minoda.
Efforts in Japan mirror a global trend by regional associations such as the LSTA, the European Loan Market Association (LMA) and the Asian Pacific Loan Market Association (APLMA) to develop standardized documentation and liquid markets. "Every one of these organizations first and foremost purpose is to promote liquidity and transparency within the market," said Pollard, who added, "The LSTA has really had tremendous momentum over the last three years as it expanded from mark-to-market and trade confirm issues to focusing on broader objectives like setting standards in the primary market all the way through distressed trading."
Kevin Tham, a member of the board of directors and chairman of the Singapore branch of the APLMA and head of loan syndication and distribution at ABN Amro, explained, "The original pillars upon which the association was founded are standardizing documentation, promoting best practices and creating a basic template to increase secondary activity." Meanwhile, Minoda is looking to efforts done by the LMA. "I'd love to copy part of their activities. They are very active and intelligent in how they deal with and document distressed loan trading," he said. Clare Dawson, executive director of the LMA added, "We are trying to build on the successes of the past. Now that we've got a large body of documentation one of our major tasks is to keep it up to date in terms of market and legal developments."