An interview with IRCJ president Atsushi Saito - In the Hot Seat

Japan, Inc., Feb, 2004 by John Dodd

WHEN ATSUSHI SAITO WAS tapped to become president of Japan's corporate "revitalization" fund, he was both surprised and honored. It isn't often that a private enterprise man gets asked to help in a project of national importance, and especially a project that could have such profound benefits.

But the ministerial staff members making the approach had done their homework. Saito is no strongman in the political arena, but in the business world, he's no lightweight. Joining Nomura as a junior analyst in the 70s, he steadily rose through the ranks.

In the early 80s he was sent to the US and later Europe to spearhead Nomura's overseas expansion into real estate and full-scale investment banking. His crowning moment during those go-go years was the securitization of the Merrill Lynch Financial Center building in Manhattan in 1988 for $100 million--the largest Japanese deal of its type at the time. He then moved to Sumitomo Life Insurance Co., managing [yen]10 trillion of pension funds, Japan's largest at that time.

We recently spoke to Saito about his outlook for the IRCJ.

Managing the IRCJ was always going to be a tough and politically sensitive job. Why did you get tapped?

Actually, the Minister of Finance remembered me from my efforts to introduce securitization into the Japanese market some years ago.

Now, your mandate is such that you only get two of the five years to actually make investments. Is that correct?

Yes, the mandate actually says that we have to get a return on any investment within three years, meaning that we can't prudently make investments after April 2005. I'm somewhat apprehensive as to whether the banks will bring us any deals of reasonable value before that date.

The IRCJ has an amazing level of empowerment.

Yes, we have a relatively large budget. We have many financing options at our disposal, such as making loans, direct investments, credit guarantees, trust banking, et cetera. We're very well equipped.

What is the main problem stopping the banks from bringing troubled companies to you?

Well, as you know, for many years, the banks have only looked at the right side of the balance sheet, for debt and equity, but they ignore the left side--or the value of the company. We are trying to establish the true value of the left side of the balance, which is substantially the value of real estate holdings.

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Naturally, our valuation on these holdings is more severe than those of the banks. We divide the holdings into core and non-core assets, i.e., which assets are contributing to cash flow. Our analysis is on a cash-flow basis and here we are generally in agreement with the banks. It is on the non-core holdings that the disagreements are occurring. We want to liquidate all such holdings, which means a substantial paper loss to the banks, although it would help the company involved.

Another point is that our charter says that we have to disclose all parts of our transactions, so that means the names of the companies, the banks, the actual bankers in some cases, the amount of assets, the amount of loan forgiveness and so on. Naturally the banks don't like this level of information disclosure.

Well there is one bank whose reputation is already damaged: Resona Bank.

Yes, that's true. And it's up to them to come to us or to the RCC, or to go to some private equity fund. From the viewpoint of speed, efficiency and cost, we are one of the best partners for Resona. I hope that they will work with us.

Are you actively approaching them?

Yes, we are approaching them and they are thinking seriously about using us.

What do you mean by revitalizing a company?

We send in our own people, we inject fresh capital or do a debt-for-equity swap, we may bring in a private partner, or "sponsor," we may put in a new CEO or even a whole management team. The objective is that in three years, we need to sell the company and recover our investment. Basically, our process is very similar to that of a private equity fund.

How does the IRCJ revitalize a company?

We sell them into the open market. To Japanese companies, funds, foreign funds, we don't have any preferences.

Market commentators are saying that since the banks are now forming their own buyout funds, the IRCJ isn't necessary anymore.

Well, in a perfect world, that may be true. However, as we've seen for a long time, the banks seem unable to bring themselves to value their loans at real market value, so for them to start transferring bad loans to a subsidiary fund would make you wonder if they can really correctly value those assets being bought out. This is a fundamental problem in Japan. I hope that over time they [the bankers] learn.