2017 Project Finance Report: Japan
Michiaki Hosoi, Naoki Kanehisa and Takeshi Takahashi, Atsumi & Sakai
Section 1. National update
1.1 What are the main project finance trends and developments (for example, increased use of project bonds) recently seen in your jurisdiction?
As part of a growth strategy announced in 2013, the Japanese government was hoping to increase the value of privately-funded public infrastructure projects in the following ten years to around ¥10 to 12 trillion ($90 billion to $108 billion), compared to ¥4.1 trillion during the preceding 14 years. In 2016, the government announced an action plan with a total target amount for domestic public-private partnership (PPP) and private finance initiative (PFI) projects for the 10-year period from 2013 of ¥21 trillion, comprising ¥7 trillion of concession-style projects, ¥5 trillion of revenue-style projects, ¥4 trillion of publicly-owned real estate utilized projects and ¥5 trillion of other projects.
To stimulate private investment, in 2011 concessions were introduced under Japan's Act on Promotion of Private Finance Initiative (PFI Act). These concessions are expected to lead to more airport, water, sewage, road, school and public housing projects, while concession agreements for three major airports were signed in 2015.
Another interesting trend is in Japan's wind power market. Until recently, offshore wind farm projects have been virtually non-existent due to high construction and operating costs, not to mention some material gaps in the legal system and, as a result, wind farms have mostly been built onshore. However recent developments including the acceleration of environmental assessments for offshore wind farms, amendments to the Ports and Harbours Act and the strengthening of the legal regime and a fixed purchase price for offshore wind electricity set somewhat higher than for solar, onshore wind power and other renewable energy sources, have begun to spur the development of offshore wind farms. This trend is expected to accelerate.
In April 2015, the Tokyo Stock Exchange set up an infrastructure fund market as a focus for investments in infrastructure facilities, such as solar power plants. The first infrastructure fund was listed on the market in June 2016. It is expected that the fund will make more projects accessible to a greater number of investors.
Section 2. ECAs and Multilaterals
2.1 What role have export credit agencies, multilateral agencies and international financial institutions played in supporting project finance transactions in your jurisdiction? Please include an overview of the main institutions domiciled in your jurisdiction.
The main Japan-based institutions that have played a part in supporting project finance are the major commercial banks and the Japan Bank for International Cooperation (JBIC). The latter is an important source of funds for projects involving overseas developments and acquisitions. Nippon Export and Investment Insurance (Nexi) is also an important provider of credit support to cover external transaction risks that cannot be covered by regular insurance. In addition, there are many trading companies, construction companies and real estate companies involved in project finance transactions as sponsors.
In general, due to the fact that financial institutions are generally able to take credit risk in respect of project finance in Japan, the support of export credit agencies or multilateral agencies is rarely required. Foreign financial institutions are showing an increasing interest in participating in the kind of large-scale infrastructure investments in Japan touched upon in section 1.1.
Section 3. Public-private partnerships
3.1 Is there a public-private partnership (PPP) act or similar statute authorising PPPs, and are both greenfield and brownfield PPP projects permitted?
The typical PPP in Japan is a PFI project under the PFI Act. Though both greenfield and brownfield projects are permitted under the PFI Act, in practice most PFI projects in Japan to-date have been greenfield. Brownfield PFI projects might become more common in future with the 2011 introduction of concession rights: the right to operate and maintain a public facility and to collect usage fees for it under the PFI Act.
3.2 May a concessionaire grant security interest in the project to its lenders and, if so, is consent of the government or contracting authority required?
A concessionaire can grant a security interest in a project to its lenders. The concessionaire can also, as the shareholder of a project company, have the project company grant security interests over several of its assets and rights and can grant a mortgage over its concession right.
Generally, consent from the government or contracting authority is not necessary for the creation of a security interest in a PFI project. However, when a project company enters into an agreement with the government, it is likely that the consent of the government would be required to create a security interest over the rights of the project company against the government under the agreement. When a project lender forecloses on a mortgage over a concession right, the permission of the relevant authority for assignment of the concession right pursuant to the mortgage is necessary.
Section 4. Foreign investment and ownership restrictions
4.1 What restrictions, fees and taxes exist on foreign investment in or ownership of a project?
There are no specific fees or taxes applicable to foreign investment in, or ownership of, a project in Japan.
A foreign investor which controls 10% or more of the shares in an unlisted project company is required to report the holding to the relevant governmental agencies. In addition, when a foreign investor intends to invest in a Japanese company that is engaged in certain restricted industries (for example electricity, gas, oil, nuclear, water, and information and telecommunications), the investor must provide advance notice to the relevant governmental authorities. The authority may refuse to permit the investment for reasons of national security, including public safety or significant adverse effect on the Japanese economy, though it is very rare for authorities to restrict foreign investment.
4.2 Can a government authority block or unwind a transaction involving foreign investors after it has closed for strategic, national security or other reasons?
Please see 4.1.
Section 5. Foreign exchange, remittances and repatriation
5.1 What, if any, are the restrictions, controls, fees and taxes on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?
Under the Foreign Exchange and Foreign Trade Law, post-facto reporting is usually required for the remittance of investment returns or payment of principal, interest or premiums on loans or bonds to parties outside Japan if the remittance is over a certain amount (currently ¥30 million).
Dividend and interest payments to parties outside Japan by Japanese entities are subject to withholding tax at 20.42% (including a special reconstruction income tax for the period from 2013 to 2037). However, some countries have tax treaties with Japan that in some cases reduce or provide exemptions from this withholding obligation.
5.2 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?
Section 6. Insurance
6.1 Are there any restrictions, controls, fees or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?
Generally, if a foreign insurance company insures assets located in Japan, it needs to establish a branch office in Japan and obtain a licence from the relevant authority under the Insurance Business Act.
6.2 Is reinsurance in the international market commonly seen on project finance transactions in your jurisdiction and are cut-through clauses permitted?
Reinsurance in the international market is not commonly used in project finance transactions in Japan. Cut-through clauses are not prohibited under Japanese law.
Section 7. Choice of law and jurisdiction
7.1 Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?
The parties' written agreement for submission to a foreign jurisdiction is effective and enforceable unless the Japanese courts have exclusive jurisdiction over the action in question under Japanese law. A waiver of sovereign immunity is generally effective and enforceable.
7.2 Is English or New York law recognised as a valid choice of law in your jurisdiction?
7.3 Would courts recognise a foreign arbitral tribunal award or court judgment? If so, what are the conditions applicable to such recognition?
Courts in Japan will generally recognise a final and binding foreign arbitral tribunal award if the content of the award does not contravene public policy in Japan.
They will also recognise a final and binding foreign court judgment where it meets the four requirements below.
The jurisdiction of the foreign court is recognised under laws or treaties;
The defendant has received a service (excluding a service by publication or any other similar type of service) of a summons or order necessary for the commencement of the suit, or has appeared without receiving such service;
The content of the judgment and the court proceedings is not contrary to public policy in Japan; and
Reciprocity of judgments is assured.
Section 8. Security
8.1 What types of security are usually seen in project finance transactions in your jurisdiction, and are there any notable exclusions, including assets which cannot be secured?
The types of security created under Japanese law on assets in project finance are, broadly, (revolving) mortgages ((ne) teito-ken), pledges (shichi-ken) and security assignments (joto tanpo-ken).
Mortgages are available for real property. When certain requirements are met, factory mortgages (kojo teito-ken) (for small factories) and factory foundation mortgages (kojo zaidan teito-ken) (for large factories) are also available. Factory mortgages and factory foundation mortgages can cover a factory's land and buildings, and machinery and equipment located in the factory.
Pledges are available for receivables, bank accounts (though the effectiveness and validity of security interests on ordinary bank accounts without a fixed term or amount is unclear), insurance proceeds and shares of a project company.
Security assignments are available for personal property (including shares), receivables and contractual rights.
It should be noted that a general security interest that would cover all or substantially all of the assets of a project is not available in Japan. In general, security needs to be granted on each asset, or specific group of assets, individually and the asset(s) sufficiently specified.
8.2 Would the law of your jurisdiction enforce arrangements whereby debt is subordinated by way of a contractual agreement (including in bankruptcy or insolvency proceedings)?
An agreement made before the commencement of insolvency proceedings that a certain debt is subordinated to other claims is effective and enforceable both in and out of insolvency proceedings.
Section 9. Perfection, priority and enforcement
9.1 How is a security interest in each type of security perfected and how is its priority established?
Mortgages are perfected by registration at the applicable Legal Affairs Bureau; priority is determined by the order in which the mortgages are registered.
Pledges on, or security assignments of receivables, bank accounts and insurance proceeds are perfected in one of two ways. Firstly, by notice to, or acknowledgement of, the obligor. The notice or acknowledgement must be accompanied by an officially certified date (kakutei-hizuke) from a notary or post office. The security is perfected on the date of delivery of the notice to the obligor or the date on which the obligor acknowledges the pledge or security assignment in writing, as applicable (in either case, not the certified date). Alternatively, these security interests may be perfected by registration at the applicable Legal Affairs Bureau, though in order to assert the security interest against the obligor, it is necessary to send a separate notice of the security interest to the obligor in any event (failure to send the notice does not otherwise affect the date of perfection). Priority of such security interests is determined by the order in which they are perfected.
Security assignments of personal property may be perfected by delivery of the property to the secured party, or registration at the applicable Legal Affairs Bureau.
Assuming that a project company is an unlisted stock company, a share pledge over the shares in the company is perfected by the pledgee's continuous possession of share certificates representing the pledged shares. If the project company does not issue physical certificates, the pledge is perfected by registering the pledgee's name and address in the project company's shareholders' registry.
9.2 Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise or defer them?
With respect to mortgages, registration and licence taxes of 0.4 % or in the case of factory foundation mortgages, 0.25 %, of the amount secured by the mortgage (or in the case of a revolving mortgage, the maximum amount covered by the mortgage) are payable by the secured creditor. In order to minimise these taxes, it is possible to obtain provisional registration of a mortgage, in which case the registration and licence taxes are only ¥1,000 per item of collateral, or in the case of factory foundation mortgages, ¥6,000 per factory foundation. However, if the creditor fails to pay the full registration and licenses taxes to complete the registration of the mortgage before another creditor enforces its rights on the same collateral, the first creditor may not assert its mortgage rights against the second creditor.
For registration of pledges or security assignments at the Legal Affairs Bureau, registration and licence taxes of ¥7,500 per registration are payable. An officially certified date from a notary costs ¥700.
9.3 May a corporate entity, in the capacity of agent or trustee, hold security on behalf of the project lenders as the secured party?
Under the Trust Law, a trustee may hold security interests on behalf of the secured party or parties, and the secured party will hold beneficial interests in the secured claims. However, such security trusts have not yet been widely adopted in the market due to some legal uncertainties with respect to the use of trusts for holding security interests.
Section 10. Bankruptcy proceedings and enforcement
10.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral/security?
In Japan, a stock company (kabushiki kaisha or KK) or a limited liability company (godo kaisha or GK) is generally used as a project company. There are a number of different insolvency proceedings in Japan; the most common in this context are bankruptcy proceedings (hasan tetsuzuki), rehabilitation proceedings (saisei tetsuzuki) and reorganisation proceedings (kosei tetsuzuki). All three can apply to a stock company but reorganisation proceedings do not apply to GKs.
Generally speaking, in bankruptcy proceedings or rehabilitation proceedings, a project lender can enforce its rights over collateral or security outside the proceedings. This is not the case in reorganisation proceedings.
10.2 Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the security?
Project lenders can enforce their rights over collateral or security outside bankruptcy proceedings in accordance with the Civil Execution Act, though usually transfer collateral or security in accordance with the relevant security agreements.
10.3 What processes, other than court proceedings, are available to seize the assets of the project company in an enforcement? For instance, is contractual enforcement (such as receivership) recognised?
Under Japanese law, contractual enforcement such as receivership is not recognised and seizure of collateral without a court order is not permitted.
About the author
Partner, Atsumi & Sakai
T: +813 5501 2131
Michiaki Hosoi acts for a wide range of Japanese and international clients in the financial and energy sectors and has extensive experience in finance transactions, including representing banks and sponsors in project financings. He acted for lenders and other project companies on more than 20 renewable energy project financings in 2014 and most recently has advised project companies on a solar power project (43.5MW) in Japan and a lender on a LNG project in Australia.
Hosoi is qualified as an attorney (Bengoshi) in Japan (2002) and holds a law degree from Tokyo University (1999). He has been a partner at Atsumi & Sakai since 2009.
About the author
Senior associate, Atsumi & Sakai
T: +813 5501 2298
Naoki Kanehisa is a senior associate at Atsumi & Sakai. He has experience in various types of finance transactions, including project finance, structured finance, capital markets, syndicated lending, investment fund, cross-border finance, and financial regulation, including securities law and banking regulation.
Kanehisa is qualified as an attorney (Bengoshi) in Japan (2007) and holds a law degree from Tokyo University (2004), a JD from Keio University (2006) and an LLM from Columbia University (2012).
About the author
Partner, Atsumi & Sakai
T: +813 5501 2129
Takeshi Takahashi is a partner of Atsumi & Sakai specialising in energy law. He is a New York qualified lawyer and has twenty years' experience dealing with projects and project finance globally. He is particularly strong in LNG related matters.
His clients include financial institutions, electric and gas utilities and shipping companies in Japan, as well as energy related companies outside Japan. In addition, he has experience in M&A transactions involving energy related businesses representing Japanese clients acquiring interests in foreign target companies.