(Corrects to reflect statements from Shinsei Trust and Orix Trust on having no direct exposure to SFCG in paragraph nine of corrected story published on Feb. 23) * Collapses with $3.6 billion in debt * Says failed to secure finance amid credit tightening * Shares untraded as people rush to sell * Analysts warn more problems ahead * Selling hits other non-bank lenders' shares
By Mariko Katsumura
TOKYO, Feb 23 (Reuters) - Japan's SFCG Co Ltd, a lender to smaller companies, failed on Monday as tightening credit hits businesses throughout the economy, and shares of other non-bank lenders plunged on fears they may face more problems ahead.
The failure of SFCG with debts of $3.6 billion -- Japan's biggest bankruptcy filing in debt terms this year -- would likely ripple through the stock market as it would make financing even more difficult for small and medium firms, an analyst said.
"SFCG's failure might become the first stage of a second round of the financial crisis," said Norihito Fujito, general manager at the investment research and information division of Mitsubishi UFJ Securities.
Japanese firms are slashing jobs to survive as the economy looks set for its longest recession in modern times. A record 33 listed companies went under in Japan last year, most of them crippled as banks tightened their lending policies.
The collapse of SFCG, whose creditors include Citibank, may point to a higher default risk among second-tier non-banks as they face difficulties collecting loans from real estate and smaller firms, said Daiwa SMBC credit analyst Takao Matsuzaka.
Shares in consumer finance firm Aiful Corp led the decline, sliding 20.3 percent to the lowest level since the issue was listed in 1997. Rival Takefuji Corp tumbled 15.2 percent, and the subindex of Japanese non-bank lenders plunged to the lowest in more than two decades.
Among real estate firms, Daikyo Inc lost 12 percent.
Tokyo-based SFCG, whose creditors also include HypoVereinsbank, said it had an outstanding loan balance of 547.8 billion yen on a group basis as of October last year.
Shinsei Trust & Banking Co, a unit of Shinsei Bank Ltd, said in a statement that while it held securitised loans of SFCG on behalf of investors, it did not have any direct exposure. Orix Trust and Banking, which was also listed as a creditor in a filing, issued a similar statement. MORE PROBLEMS AHEAD?
In seeking court protection from creditors under bankruptcy law, SFCG said it had outstanding commercial paper of just 1.5 billion yen ($16 million).
The lender, which had borrowed heavily from foreign banks including Lehman Brothers, suffered from unrecoverable losses from property-backed loans to small and mid-sized companies.
It has also been slammed by tighter interest rate regulations in the consumer lender industry, forcing it to repay previous interest that had been ruled to be too high.
SFCG, which started business in 1978, generated about 80 percent of sales from the third-party guaranteed "Shohkoh loan" and 8 percent from property-backed loans.
SFCG filed for court protection under bankruptcy law with 338 billion yen ($3.6 billion) in debt, saying it had not been able to cope with mounting losses in its mainstay secured-loans businesses thanks to rising bankruptcies, sinking property prices and weak demand for new loans.
The lender, which posted a group net profit of 6.85 billion yen in the year ended July last year, said it failed to secure 7.5 billion yen needed for its February settlement.
"The move shows that there is extremely severe credit tightening happening in Japan," Fujito said.
"We'll need to watch small REIT and real estate companies' businesses as many of them are SFCG borrowers. The business outlook for non-bank firms is also a concern."
SFCG is the 10th listed Japanese company to fail this year.
On Monday, seven other non-listed companies including a restaurant operator Kanda Seiyoken, stopped operations prior to bankruptcy filings, research firm Teikoku Databank said. Shares in SFCG, which will be delisted on March 24, were untraded with a glut of sellers at 1,092 yen, down 200 yen or 15.5 percent.
The Nikkei average fell 0.6 percent, erasing early losses after a media report that the U.S. government may end up owning as much as 40 percent of major U.S. bank Citigroup, while money markets were also unaffected by SFCG.
"The money market is calm today and I do not get the sense that there is any impact," said an official at a Japanese money broker.
"The amount of commercial paper is also very small, so I think it is safe to think that there will be no impact on the market.". ($1=93.50 yen) (Additional reporting by Mayumi Negishi, Emi Emoto and Nathan Layne; Editing by Michael Watson and Erica Billingham)