More insurance systems for fund-raising activities

As had been pointed out, financial institutions, and especially Japanese banks, heavily rely on physical collateral, real estate in particular, when they extend loans. Small and medium enterprises (SMEs) have accounts receivable that exceeds real estate and cash/deposits. However, they fail to make adequate use of these accounts receivable for fund-raising measures.

The main reasons for this inadequate use are high risks, including default risk of trade debtors and dual transfer of accounts receivable, and large costs of managing them. Accordingly, private financial institutions have been inactive in extending loans secured by accounts receivable.

Under these circumstances, in order to encourage active use of SMEs‚ accounts receivable as collateral when credit guarantee corporation (CGC) guarantee SME loans, the accounts receivable-backed insurance was established on December 2001, with the aim of providing new fund-raising measures for SMEs lacking physical collateral.

There are a number of breakthroughs in this new insurance system. For example, it has been extremely difficult for SMEs to transfer their accounts receivable because such a transaction is considered to be evidence of a critical deterioration in the borrowers‚ creditworthiness according to traditional Japanese business practice. However, it is not impossible for SMEs using this system to transfer their accounts receivable without letting their trade debtors know that they have done so.

As of November 2002, this insurance system was expanded. More eligible SMEs accounts receivable can be used as a collateral when CGCs provide financial institutions with guarantees for their loans to SMEs.

Special measures to facilitating fund raising and business revival The severe economic and financial situation facing SMEs has settled down somewhat. In order to ensure the smooth flow of funds to SMEs, the refinancing guarantee system for facilitation fund-raising (RGSFF) and the debtor-for-possession (DIP) guarantee system have been established, and safety net guarantee system (SNGS) has been expanded as has the aforementioned accounts receivable-backed guarantee system. The Japan Small and Medium Enterprises Corp. (Jasmec) reinsures these guaranteed liabilities of CGCs.

The RGSFF

The refinancing system encourages SMEs to refinance a guaranteed loan or concolidate existing guaranteed loans so that SMEs can reduce monthly payment amounts and facilitate fund-raising.

The DIP

The system supports the SMEs that are wrestling with rehabilitation procedures under related laws, including the Civil Rehabilitation Law and the Corporate Reorganization Law. To be eligible for the program, the SMEs must meet the following criteria:

• SMEs must be conducting a rehabilitation plan approved under the two mentions pieces of legislation.

• SMEs must receive support from financial institutions and counterparty companies and show reasonable expectation for business recovery.

• SMEs must show the certainty of repayment.

Safety Net Guarantee System

In order to facilitate fund-raising of SMEs that are having trouble achieving financial stability due to bankruptcy of counterparty companies, failures of financial institutions, or natural disasters, CGCs guarantee SMEs loans whose maximum guaranteed loan amount is separate from ordinary guaranteed loans. In addition to such SMEs, the following SMEs also become eligible for the safety net system after the expansion of the system. They are:

• SMEs that decrease the amount of loans through reasonable downsizing of financial institutions‚ operations (branch reduction).

• SMEs that have a chance to rehabilitating, but whose loans have been assigned to RCC (resolution and collection corporation).

Specific Corporate Bond Insurance

In addition to the guarantees of loans to SMEs, Jasmec insures the guarantees concerning corporate bonds issued by SMEs under the small business credit insurance system. Such insurance, in response to diversification of the means of SMEs to raise funds, facilitates their access not only to indirect finance but also to direct finance.

SMEs, having limited access to the capital markets, are heavily relying on lending from financial institutions for their fund-raising. Accordingly, at the time of the credit crunch, they inevitably face severe financial difficulties. Recognizing this situation among SMEs, the government introduced specific corporate bond insurance, which enables SMEs to issue corporate bonds in order to help them diversify their methods of fund-raising. The comprehensive insurance contract between CGCs and Jasmec is similarly applied to this insurance as in the case of insurance for indirect finance.

For insurance coverage, guarantees by CGCs are required to guarantee obligations on privately placed bonds issued by SMEs stipulated in the small business credit insurance law, which are underwritten by financial institutions. Also, this insurance has some other requirements in terms of eligibility of an SME. Applicant SMEs must meet several requirements, including capital asset ratio, net asset ratio, ratio of operation profit and interest earned to asset, and interest coverage ratio.

(To be continued)