The Wall Street Journal was out there, this weekend, not exactly getting the story down and saying that Tokyo Star Bank might default on its obligations. As you might know, Tokyo Star Bank is one of the “portfolio of companies” of Advantage Partners, the group that bought English-teacher dispatch company Interac last year.
Japan’s Tokyo Star Bank is owned by a special-purpose vehicle set up by private-equity firm Advantage Partners LLP. A Global Finance article Monday incorrectly said that Tokyo Star Bank will probably default on its loan obligations. Any default would be by the special-purpose vehicle, not Tokyo Star or Advantage Partners.
When you see the words “special purpose vehicle” nowadays, it’s usually in a circumstance where you want to go “uh oh”.
The short story is that Tokyo Star Bank is a successor bank to a Japanese one that had failed in the late 1990’s or the year 2000. A venture capital firm called Lone Star bought a controlling interest in the bank, and in turn sold that interest, in 2008, to the special purpose vehicle organized by Advantage Partners.
Well, remember that a bank has three main sources of funds:
1) Money that depositors put into the bank;
2) Money that the bank issues bonds for to raise. These are kind of like deposits, except they are over the longer term, and potentially the bond can be walked away from.
3) Money that the owners of the bank themselves put in. This is usually called equity capital.
What is going on at Advantage Partners and Tokyo Star is that the Number Two category is at issue. Tokyo Star got funding through a special purpose vehicle, which in turn borrowed the money. And so now, the special purpose vehicle is saying that it can’t pay it back. In almost all certainty, this is because Tokyo Star Bank can’t come up with the money, to give to the special purpose vehicle, to (in turn) give to the people who lent the money.
From my reading, Advantage Partners is the equity holder in the bank, so if the special purpose entity doesn’t pay up on time (called a “default”), there is some agreement that Advantage Partners takes a hit on its equity. (Maybe loses all of it.)
The question that pops to my mind is: where are the Japanese regulators? I mean, it’s nice to set up these convoluted little investment puzzles, but it looks to me like a bank that, under a post-Lehman analysis, is failing. (“Post-Lehman analysis” is my convoluted way of saying, “truth be told”). If the bank can’t pay one class of creditor, and the owners themselves are probably going to be out all their equity, isn’t the bank insolvent?
The depositors are no doubt insured for whatever amount Japan gives, but the uninsured creditors are out some dough that they were promised, right?
Now back to Interac: Somewhere along the line, Advantage Partners got money to buy out Interac last year. A major shareholder retired, and, presumably, either Advantage Partners used their own money, or lined up other, uh, partners, to put in the money, to buy Interac.
You might say, well, those people lending to the special purpose vehicle connected to Tokyo Star were taking their own risk; but an investor might also wonder where Advantage got the money to buy Interac, while its own bank was going into the tank. They would say, “Advantage, in fairness, you should have been shoring up the bank’s capital (so that the bank would have sufficient money to make to make payments to the special purpose vehicle, to in turn pay the lenders).” I know that’s what I would say.
When that Advantage Partners deal went down with Interac, I wondered what advantage there was to owning a controversial cash cow. Now I’m beginning to think that this was a favor to the Japanese government (keeping the teacher dispatch system rolling), in return for “hey, you look the other way about Tokyo Star.”