Long slide may signal end for Daiei
By Ian Messer
Bloomberg News Service
TOKYO — Marc Desmidt sees a bright side to the 41 percent plunge in Daiei Inc.'s shares since Thursday: The slide suggests investors believe Japan is serious about pulling the plug on "zombie" companies.
"Perhaps this is the beginning of the big clearing out of the corporate sector we have been waiting for," said Desmidt, who helps manage about $8.2 billion of funds at Merrill Lynch Investment Managers Co.
Daiei, which has $17 billion in debt after three bank bailouts, has been the worst performer on the Topix index in the past three days as a new team of regulators suggested they will allow banks' most indebted borrowers to fail.
Sorting out an estimated $430 billion of bad loans is vital for banks to increase lending to healthier companies and revive the economy, investors say.
After just a week as the head of the Financial Services Agency, Heizo Takenaka said on Sunday that Japan will unveil plans to tackle those bad loans as early as this month, and there may be "some bankruptcies."
On Thursday, he chose a consultant to his advisory panel, Takeshi Kimura, who has said crippled banks should be nationalized, a step that would lead to increased foreclosures on deadbeat borrowers.
Kimura's appointment weighed on a slew of shares in companies burdened by debt. Among companies that lost more than a fifth of their value in the past three trading days were condominium builders Misawa Homes Co. and Daikyo Inc., construction company Kumagai Gumi Co., and consumer credit company Orient Corp.
Those companies are among the most indebted on Japan's Topix index. Based on long-term debt to equity, Orient ranks second with long-term debt of 110 times its common equity as of March 2002; Daikyo ranks fourth with long-term debt of 81 times its equity as of March 2001; and Kumagai Gumi is seventh with a debt-to-equity ratio of 34 times as of March 2002, according to Bloomberg data.
Daiei's debt ranked 12th at 15 times equity as of March 2001 and Misawa's was 29th at seven times equity as of March 2002.
While shareholders of those companies may be hit by stricter demands for loan repayments, some fund managers say the result would help Japan crawl out of its third recession in a decade and end a plunge in stocks that took the Nikkei 225 Average to a 19-year low yesterday.
"A hard landing is positive in the long term," said John Wilson, who helps manage $2.5 billion in Japanese equities at HSBC Asset Management Japan KK. "We've had years without a strong recovery. The main thing that has been holding it back is the unresolved bad-loan problem."
Daiei, which this year obtained another bank bailout to avoid collapse, is sticking to a plan to trim debt by February 2005. "Investors will judge us on results of our restructuring efforts," said Daiei spokesman Mitsuru Sano.
It's not hard to understand why Daiei was saved from ruin. The supermarket chain, which opened its first outlet in 1957, symbolized Japan's post-World War II boom. It rose up to serve the nation's exploding consumption society and became Japan's top retailer. Kobe-based Daiei amassed debt in the late 1980s and '90s by expanding into businesses such as hotels and real estate. As Japan's economy slipped into recession, the company was unable to pay back its loans.
While the retailer has slipped to No. 3, it still had almost 96,000 people on its payroll as of February. Daiei directly operates 271 stores — including several in Hawai'i — eight restaurant chains, seven hotels and owns one of Japan's top professional baseball teams.
"Seeing those companies go would have a significant ripple effect on Japan's overall economy, but from the market's perspective those stocks have no value," said Takehiko Takachio, who helps manage about $6 billion in equities at Kokusai Asset Management Co.
