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. Last Updated: 07/27/2016

Japan's Banks Speed Up Trade of Secondary Debt

LONDON -- Japanese banks weighed down by European corporate debt have been increasingly unloading it in recent months and are expected to speed up the process this year, financial sources said this week.

Gary Klesch, a U.S. expert on the secondary debt market, said Japanese banks were busy selling distressed debt, meaning loans in financially troubled firms, in the last several months.

This is likely to pick up before March 31, the end of Japan's financial year.

Klesch and banking sources said the trend marked a changing practice in Japanese banks, which used to keep troubled loans on their books, but have been forced by corporate crisis at home to take a more pragmatic approach.

"It was never in their culture (to sell distressed debt). They just held on to it and hoped things would get better. Now they're realizing the magnitude of the problem," Klesch said of Japan's banks.

By the late 1980s, after years of economic boom in Britain, Japanese banks held an estimated 30 to 40 percent of syndicated loans to European companies, bank sources say.

Klesch, whose Klesch & Co. Ltd. specializes in distressed debt, said Japanese banks had been selling loans in everything from GPA Group, the Irish aircraft leasing company, to Polly Peck International, to companies once controlled by the late Robert Maxwell.

One Japanese banker described a noticeable increase in the sale of troubled European loans in recent months.

He said the trend sped up after the Industrial Bank of Japan, or IBJ, sold ?70 million ($102 million) last March in loans to Isosceles, a British retail group trying to restructure its debt.

IBJ sold the debt after tax authorities agreed to allow the bank to offset its loss against taxable income profit.

The Japanese banker, who asked not to be identified, said the sale sent a signal to other Tokyo-based finance houses that it was acceptable to use the emerging secondary debt market to bail out of distressed debt exposures.

The increased selling by Japanese banks in general could help boost Europe's secondary debt market, which has only become active in recent years and has attracted mostly U.S. "vulture funds," investment funds that buy up troubled company debt.

The funds say they have given the U.S. market liquidity, but some European observers, like the Bank of England, have said they fear secondary debt trading could hurt corporate restructuring by encouraging banks to bail out.