Aiful's Rehab Plan Needs Support From All Creditors

     Nikkei today reported what insiders have long known: the privately orchestrated bailout for Aiful requires unanimous approval of more than 70 creditor financial institutions, many of which presumably have bought Credit Default Swap (CDS) protection against their exposure.  Chances of success are grave and slim; Aiful seems headed for Civil Rehabilitation, or quite possibly even bankruptcy.

     The company's English Investor Relations home page omits a very important earnings revision announcement made on September 24th.  In that release, the company clearly states that success of Alternative Dispute Resolution (ADR) mediated by the Japan Association of Turnaround Professionals requires unanimous approval of all creditor financial institutions (bondholder are not involved). 

     Provided for under the Special Measure for Industrial Revitalization, creditor ADR aims to garner support from creditor financial institutions for a government supported bailout of major mining and manufacturing companies whose competitive position has been affected by the global financial crisis.  In such cases, incentives to creditors would include a potential injection of government guaranteed capital from the Development Bank of Japan or other designated public lending institutions.  Additional incentives include waiver of corporate registration fees and real estate taxes, accelerated depreciation, waiver of amortization ceilings, tax credits, etc.

     In the case of Aiful, State Minister for Postal Affairs and Financial Services Hon. Shizuka Kamei has presumably dismissed government support for a bailout, leaving the company to go it alone with creditors.   Fostering agreement of more than 70 creditor financial institutions on a privately orchestrated bailout that. at best, puts the interests of banks behind those of bondholder will be a long shot.

     On Tuesday October 6th, the Japan Determination Committee of the International Swaps and Derivatives Association, or ISDA, ruled that Aozora Bank (TYO:8304) could not collect on credit default swap protection on Aiful debt, judging that no credit event has yet occurred.  This ruling is sensible in that, although invoking protection against banks calling in loans prematurely, the company has not failed to meet existing schedules for repayment of principal or interest.  While analysts such as USB had been encouraging creditors to buy credit protection on the company's debt as early as two years ago, disparities in credit protection among creditors may make consensus on any privately orchestrated bailout difficult.

     Moreover, the company's announcement of plans to boost its allowance for bad debts and reserve for interest refunds raise the possibility that the company's shares could be delisted from the Tokyo and Osaka Stock Exchanges if stockholder's equity falls into negative territory, yet another reason why the Aiful ticker symbol may cease to appear by January 2010.