Advantage grapples with Tokyo Star Bank leverage

While the firm itself declined comment, sources close to the situation have said that Advantage has been seeking investors to inject new capital in the special-purpose company (SPC) that Advantage established in order to buy the bank in 2007.

The original deal marked one of the largest buyouts completed by any private equity firm in Japan. It was also a highly leveraged transaction that closed during the golden days when credit was easy and banks were receptive – irrespective of the multiples. The current search for new capital is yet another example of how firms are dealing with assets purchased well above fair value, and well before the Crisis.

“We have known for a while that Advantage Partners were looking for new investors to increase the equity ratio of the SPC,” one private equity source told AVCJ. Another added that Tokyo Star’s cash flow was actually not bad, but that the SPC needs more capital, and not just to repay the JPY124.6 billion ($1.5 billion; $1 billion at historical rates) in senior debt. He declined to elaborate.

The bank was deeply distressed when it was purchased by US buyout fund Lone Star in 2001. Lone Star exited one third of its stake in an initial public offering in 2005 and sold the rest to Advantage Partners in 2007, allowing it to book about JPY90 billion ($1.1 billion) in profits. Advantage acquired a 100% stake from Lone Star and other investors for something in the range of $2.2-2.4 billion. The deal was financed by JPY169.6 billion ($2 billion; $1.44 billion at historical rates) in senior loans and mezzanine debt from a number of lenders, including Merrill Lynch (later bought by Bank of America), Credit Suisse, private equity-owned Shinsei Bank and Credit Agricole. The debt is due in 2013.

In June this year, Orix Corp., Japan’s biggest leasing firm and property developer invested JPY10 billion ($121.8 million) in Tokyo Star through the purchase of preferred shares to help shore up the balance sheet of the SPC.

“As the worst case scenario, Advantage may have to put their own capital in the SPC, or issue new shares of Tokyo Star Bank – although that would dilute their holdings.” The source added that another option would be to borrow money at much higher rates than the current loans, which would put the bank under even greater strain. 

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• Topics
• North Asia
• Financials
• Performance
• Advantage Partners
• Lone Star Funds