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News Release

2nd Survey on the Role of Financial Institutions in Local Economic Regeneration
— Expectations of multilateral regeneration of local economies involving the Enterprise Turnaround Initiative Corporation of
Japan —

May 12, 2010

  • Regional financial institutions still take a bleak view of business conditions: 47.2% of respondents said they "Have deteriorated" and 2.8% that they "Have deteriorated severely", making a total of 50% who felt that they "Have deteriorated" or worse.
  • The main methods of business regeneration applied to borrowers were "Preparing and supporting the implementation of management reforms, etc." and "Extending repayment deadlines", and around 80% of respondents said they had not applied more in-depth measures such as "Proposing a change of business model".
  • Although many respondents believed in the effectiveness of the multilateral turnaround of several companies at a time, 80% of respondents had no experience of such methods.
  • Respondents recognized the effectiveness of regional financial institutions and of the Small and Medium Enterprise Turnaround Support Committee as agents in local regeneration but had a low opinion of government-affiliated financial institutions and private sector funds.
  • Over 70% of respondents felt that the Enterprise Turnaround Initiative Corporation of Japan was effective because it was "Able to negotiate with creditors from a neutral standpoint" and "Able to dispose of disclosed claims and turn businesses around by buying up debt".

The Japan Research Institute, Limited (President: Yasuyuki Kimoto; Headquarters: Chiyoda-ku, Tokyo) in March-April 2010 conducted a second survey among regional banks, members of the Second Association of Regional Banks and shinkin banks, on the role of financial institutions in the regeneration of local economies.
The major results of the survey are outlined below.

Outline of Survey

Method: Questionnaires distributed and recovered by post
Target: Regional banks, members of the Second Association of Regional Banks and shinkin banks
Number of questionnaires issued: 117
Number of responses received: 36
Recovery rate: 30.8%

Purpose of Survey

In October 2009, a body known as the Enterprise Turnaround Initiative Corporation of Japan (ETIC) was established. ETIC's purpose is to undertake the turnaround of core companies and it is funded by national- and regional-level financial institutions. As wider use is made of the ETIC, it is likely that the discussion of regional regeneration and the involvement of the various organizations concerned will intensify.

The Japan Research Institute, Limited's aim in conducting this survey was to gain information from regional banks, members of the Second Association of Regional Banks and other regional financial institutions that bring together people, materials, money and information in a region, regarding the local economic situation, progress on initiatives for local regeneration, policies for the future, etc. and, on the basis of the information gained, to consider future policy directions in this area.

Major Results of Survey

  • Regional financial institutions' perceptions of business conditions have deteriorated since the previous survey and the severity of the situation in the construction sector has become even clearer.
  • When asked how they evaluated business conditions over the past year, 50% of regional financial institutions said they were "Unchanged" while 50% said they had "Have deteriorated" ("Have deteriorated" 47.2%; and 2.8% "Have deteriorated severely"), indicating that regional financial institutions are still taking a bleak view of business conditions. When asked for their assessment of the severity of business conditions by industry, 100% of respondents said conditions in the construction sector were "Severe" or worse ("Very severe" 66.7%; "Severe" 33.3%).

  • The business turnaround methods most commonly applied by regional financial institutions were "Preparing and supporting the implementation of management reforms, etc." and "Extending repayment deadlines", and around 80% of respondents said they had not applied more in-depth measures such as "Proposing a change of business model"
  • When regional financial institutions were asked what methods they applied in turning borrowers' businesses around, the most common response was "Preparing and supporting the implementation of management reforms", which was cited by 100% of respondents, 63.9% of respondents saying they "Often apply it" and 36.1% that they "Apply it". The second most commonly cited response was "Extending repayment deadlines", cited by 97.2% of respondents. Respondents would normally need to apply more in-depth measures such as "Proposing a change of business model", but only 22.2% of respondents said they applied this method and nearly 80% said they had applied it infrequently or not at all ("Do not often apply it" 75.0%; "Do not apply it" 2.8%).

  • Regarding multilateral methods in which several companies are turned around together (for details, see p. 7 of attached documentation), although respondents recognized the effectiveness of such methods, only a minority had any experience of them. A majority of respondents cited "Securing and training human resources to provide leadership after a merger with a holding company" and "Negotiation with local interested parties" as problems surrounding these methods.
  • When respondents were asked whether they believed multilateral methods in which several companies are turned around together were an effective approach to local regeneration, more than 60% replied that they "Believe they are effective". However, while 16.7% of respondents said they had experience of these methods, more than 80% (83.3%) said they had none. Regarding problems surrounding these methods, 55.6% of respondents cited "Securing and training human resources to provide leadership after a merger with a holding company" while 52.8% cited "Negotiation with local interested parties", more than half of all respondents in each case.

  • When asked which players (organizations) they felt had achieved the results expected of them, more than 70% of respondents cited both "Regional financial institutions" and the "Small and Medium Enterprise Turnaround Support Committee".
  • When asked whether organizations involved in local regeneration had achieved the results expected of them, 77.7% of respondents said that "Regional financial institutions" and 72.2% said the "Small and Medium Enterprise Turnaround Support Committee" had achieved results. When respondents were asked which organizations had not achieved significant results, the most commonly were "Government-affiliated financial institutions" (cited by 55.6% of respondents), followed by "Small and medium enterprise turnaround funds" (27.8%) and "Private sector funds" (25.0%).

  • More than 70% of respondents said that the Enterprise Turnaround Initiative Corporation of Japan (ETIC; established in October 2009 and funded by the government) was "Effective". When asked for their reasons, 80% said that ETIC was "Able to negotiate with creditors from a neutral standpoint". In future, ETIC should be used for "multilateral" turnarounds, in which a number of medium-sized and core companies in a region are turned around together.
  • The Enterprise Turnaround Initiative Corporation of Japan (ETIC), which was established with government funding, is a government-affiliated corporate turnaround fund, whose main purpose is to turn around medium-sized and core companies in a region. When respondents were asked how effective ETIC was in turning businesses around, nearly 80% (77.8%) said it was "Effective", far more than the 13.9% who said it was "Not very effective". The most commonly cited reasons for ETIC's effectiveness were that it was "Able to negotiate with creditors from a neutral standpoint" (85.7% of respondents) and that it was "Able to dispose of disclosed claims and turn businesses around by buying up debt" (50%).
    The establishment of ETIC, whose position as an organization in which the government is involved, gives it a unique ability to negotiate from a neutral standpoint, also presents an opportunity for "multilateral" turnarounds, in which a number of medium-sized and core companies in a region are turned around together. In the future, ETIC should set out a new model for business turnaround functions that conventional players in local regeneration alone are unable to provide.

    For more information on the content of this report, please contact Maruyama, or Kameyama, the Japan Research Institute, Limited.

    E-mail:rcdweb@ml.jri.co.jp

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