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Recent trends in syndicated loans

Shunsuke Minowa
As a result of continuing low domestic demand for funding, the amount of syndicated loans made in Japan has remained stagnant, at a level of approximately ¥25 trillion ($281 billion) per year, since 2006. Certain trends have begun to appear in the Japanese market in response to this situation.

Before the amendments to the Financial Instruments and Exchange Law (FIEL) in 2012, despite the fact that syndicated loans arranged by financial institutions are generally not regulated under the FIEL, loan receivables from educational institutions are an exception to this general principle and regulated under the FIEL as 'deemed securities'. Accordingly, syndicated loans provided to these institutions have traditionally been considered as regulated under the FIEL and the arrangement of such loans considered a so-called Type II Financial Instruments Business, which carries with it many restrictions under the FIEL. Accordingly, even in situations where all of the lenders in the syndicate were sophisticated financial institutions the applicable FIEL protections were nonetheless applied, hindering the supply of financing and flow of funds in the market.

In order to resolve this issue, Article 1 of the Order for the Enforcement of the FIEL, which stipulated that loan receivables from the educational institutions are to be regarded as deemed securities, was amended to clarify and limit when such loan proceeds would qualify as deemed securities. Following the amendment, provided that the lender is an entity which is permitted to make loans to educational institutions on a regular basis in accordance with the Bank Act and other applicable laws and regulations, and the transfer of such loan receivables to any entity other than a financial institution is prohibited, then such loan receivables will not qualify, or be treated, as deemed securities. Accordingly, where a financial institution acts as an arranger for a loan to a financial institution, such loan transaction no longer automatically qualifies as either an offering of securities, a private placement or a subscription agreement, all which are FIEL-regulated transactions. This amendment allows financial institutions to arrange syndicated loan transactions in Japan in an FIEL-exempt manner, provided the aforementioned conditions are met.

Cross-border and electronically-recorded syndicated loans

Despite the increased complexity, and language issues that may arise, as more Japanese companies expand their overseas operations it is expected that the use of cross-border syndicated loans as a source of financing will continue to increase.

Further, the demand for financing is not limited to Japanese companies. In particular, as the issues in certain global capital markets have persisted, more and more foreign companies have begun sourcing financing outside of their home jurisdiction. For example, in Asia and Oceania, which have seen relatively strong economic growth recently, companies looking to participate in infrastructure and other large projects have seen a significant increase in their financing requirements. The well-funded Japanese loan market has attracted not insignificant attention from such companies.

In addition, Japanese financial institutions remain very much interested in expanding their portfolio to include syndicated loans to foreign entities. Generally, domestic Japanese companies are well financed and do not require complex funding solutions and, as such, the loan-to deposit ratio of many Japanese financial institutions is lower than desired. By participating in cross-border transactions, in which lenders are generally able to obtain a high margin of return, domestic financial institutions are able to improve their respective balance sheets.

Another trend in the Japanese market is the increased use of electronically-registered loans. The electronic registration of loans is a new development under the Electronically Recorded Monetary Claims Act (No 102 of 2007), which allows for the electronic transfer of loan receivables through the 'Electronic Monetary Claim Recording Institution'. It is expected that the convenience of the electronic registration system will encourage more and more lenders to take advantage of it and facilitate growth in the secondary lending market.

Shunsuke Minowa

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