JAPAN Law and Practice Contributed by: Jiro Mikami, Ryo Okubo, Hiromi Hattori and Tomohiro Koyasu, Nagashima Ohno & Tsunematsu
Due to the fact that dividends to shareholders are distributed after the company has repaid all of its creditors, the mezzanine financier, as a pre- ferred shareholder, is structurally subordinated to the senior lenders. Subordinated loans are secured by a security package, which is almost identical to the secu- rity package for senior lenders except that it is second-ranking. This means it is subordinate to the first-ranking securities created for sen- ior lenders. The subordinate nature of these subordinated loans is also created through an intercreditor agreement among senior lenders, mezzanine financiers and the borrower. 3.3 Bridge Loans Bridge loans are not commonly used in the con- text of acquisition finance. 3.4 Bonds/High-Yield Bonds Bonds are not commonly used in the context of acquisition finance. One of the reasons for this is that if secured bonds are used, an issuer of secured bonds is required to comply with a range of regulations under the Secured Bond Trust Act (Act No 52 of 1905), which are costly and burdensome. A high-yield bond market has not yet developed in Japan. As a result, high-yield bonds are not used to finance acquisitions. 3.5 Private Placements/Loan Notes Loans for acquisition finance are not typically accompanied by an issuance of notes, so they are considered receivables and do not fall within the definition of “securities” under the Financial Instruments and Exchange Act (Act No 25 of 1948, the “FIEA” ), which is the Japanese securi- ties law. Private placement rules do not therefore apply.
On the other hand, preferred shares used for mezzanine financing are considered “securi- ties” and the issuer typically relies on the small number private placement, which restricts the number of offerees of solicitation to less than 50. 3.6 Asset-Based Financing In Japan, asset-based financing is rarely includ- ed in the component of leveraged buyout financ- ing structure. Leveraged buyout lenders typically view the assets owned by the target as integral components of the security package for the lev- eraged buyout finance and take the value of the asset into consideration when they determine the debt capacity. If mezzanine finance is provided in the form of a subordinated loan, an intercreditor agreement is almost always executed between the borrower, senior lenders and mezzanine financiers. Contractual Subordination It is very common practice to use contractual subordination arrangements, which are achieved by the borrower, senior lenders and mezzanine financiers entering into an intercreditor agree- ment. This contractual subordination arrange- ment is only valid among these parties and cannot be claimed against third parties such as general creditors. Another way to create the contractual subor- dination of the subordinated loans is to make the subordinated loan a statutory subordinated claim through an agreement between the bor- rower and the mezzanine financiers. These statutory subordinated claims were introduced in 2005 by amendments to the: 4. Intercreditor Agreements 4.1 Typical Elements
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