Japan's Distressed Debt Market

 
Author/Editor: Ohashi, Kazunari ; Singh, Manmohan
 
Publication Date: May 01, 2004
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: Sizable risk capital from outside may be necessary to accelerate Japan's corporate restructuring to replace the stock of impaired bank loans. To attract risk capital, impaired loans must find market-clearing prices. However, the asymmetry in the bid-ask prices faced by banks and distressed-debt investors continues to stall efforts to create a liquid distressed-debt market. This paper asserts that the wedge between the prices faced by different participants is primarily a result of different valuation methods employed by banks and distressed-debt investors. On the one hand, banks do not recognize "maturity default" that results in banks rolling over impaired-loan accounts, effectively turning them into perpetual debt, which is expected to capture any upside potential for value. On the other hand, distressed-debt investors presently view their investments as equity stakes that require improved cash flows, unlike the buy-and-sell distressed-collateral market that existed in the mid-1990s. We suggest that bids from distressed-debt investors may not be as low as they are deemed by local banks and the asymmetry in prices may be reduced if banks value their claims as corporate equity.
 
Series: Working Paper No. 04/86
Subject(s): Debt | Japan | Emerging markets | Debt restructuring

Author's Keyword(s): Non-performing loans | sub-performing loans | distressed debt investors | vulture funds
 
English
Publication Date: May 01, 2004
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA0862004 Pages: 29
Price:
US$15.00 (Academic Rate:
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