Investors Too Pesimistic on Aiful (and Takefuji, for that matter)?

This Bloomberg report from last Friday gives two side to the plight of Aiful (AIFLY/OTC), and even mentions Takefuji (8564/JP or TAKAF/OTC):

Investors should sell the bonds of Japan's Aiful Corp. and buy default protection on concern rising customer claims for interest refunds will erode earnings, UBS Securities Japan Ltd. said.                  

The risk that Aiful, the country's biggest consumer lender by assets, may fail to repay its debts increased by the most among Japanese companies from a month earlier, prices of credit- default swaps show. The perceived risk of owning its bonds may stay close to the highest in more than five years, according to estimates by Nana Otsuki, a credit analyst at UBS in Tokyo.

"The industry as a whole will find it difficult to recover,'' Otsuki said today. "We cannot see the element that would bring the CDS premium to a much lower level.''

Now the other side:

The increasing cost of credit-default swaps tied to Aiful and Takefuji overstates their default risks, said Koji Mori, a fund manager at Daiwa SB Investments Ltd. in Tokyo.                         

"People have become too pessimistic about the outlook on Aiful,'' said Mori, who oversees the equivalent of about $386 million in mutual funds at Daiwa SB Investments. "Loans are returning and there's little risk to the company's funding.''

Aiful shares advanced 17 percent today, the most since increasing by a record 18 percent on Sept. 27. Promise Co., Japan's third-largest consumer lender, rose to its highest in almost a month after the Nikkei newspaper said it may earn more than expected this year.

"The prospects that we will return to profit this fiscal year haven't changed yet,'' said Yuji Fukada, chief of investor relations at Aiful. The company "has no problem on funding'' as its assets are being restructured and unused loan commitments from banks total about 260 billion yen, Fukada said.           

Portfolio positions in both Aiful and Takefuji are being maintained.

Comments

[Sivaram Velauthapillai]

A lot of these lenders have written off most of their potential liabilities. For example, if Takefuji management is to be believed (not necessarily a safe thing to do ;) ), it should be back to profitability next year. One should always discount some further write-offs but most of the liabilities seem to have been accounted for.

My feeling is that the consumer settlements are mostly done with. Instead, the concern to me is whether they can recover their operations given that they lost the gray zone. I remember looking at Takefuji (I'm sure it's the same with the other lenders) and they had most of their loans in the gray zone. With the loss of that, can they compete at the lower rates, which are closer to the conventional banks?

[John]

Sivaram: My reading is that investors thought the companies would go out of business, period. That's probably true for some smaller outfits, but not for the big four. And there's probably going to be significant consolidation -- even including the banks.