* Consumer lenders hit by costs to repay overcharged interest
* Takefuji seen vulnerable due to lack of big bank backing
* It had $5.2 bln in liabilities as of end June-Tokyo Shoko
* Takefuji says no decision on bankruptcy
* S&P downgrades Takefuji's debt rating a notch to CC (Adds Standard & Poor's credit downgrade)
By Taiga Uranaka
TOKYO, Sept 27 (Reuters) - Japan's Takefuji Corp is preparing to file for bankruptcy with $5.2 billion in debts, media said, the biggest consumer lender to fail under the weight of court-ordered interest repayments and tighter lending rules.
Takefuji, which has been considered at risk for failure because it doesn't have the financial backing of any of Japan's big banks, is making final preparations to file for bankruptcy protection, the Nikkei newspaper and other Japanese media said.
Once Japan's largest moneylender, Takefuji said it had not decided to file for bankruptcy, but would not comment on whether it was considering such a move. "It is untrue that we made such a decision as some media have reported," it said in a statement.
Shares of Takefuji closed Monday untraded due to a glut of sell orders. Trading in the stock had been suspended by the Tokyo bourse for most of the day due to the media reports.
Shares of Acom Co, Promise and other rivals tumbled on the reports, which analysts said highlighted a major risk to the industry. A Japanese court in 2006 ruled the lenders had charged too much in interest and ordered them to repay borrowers.
"There are concerns that reimbursement claims from customers, which means costs for consumer lenders, may increase and weigh on the whole industry, and such concerns are probably pushing down their shares today," said Koichi Niwa, senior analyst at Mizuho Securities.
SCANDAL HIT
Consumer finance companies emerged as big lenders in the 1990s as Japan's economy tanked and commercial banks reined in credit. Able to borrow at very low rates, they charged interest of nearly 30 percent, which allowed them to absorb high default rates on uncollateralised loans.
Started as a small money lender in 1966, Takefuji grew to become Japan's biggest consumer finance company. Its founder Yasuo Takei was ranked by Forbes as Japan's second-richest person in 2005, worth of $5.6 billion.
His company became known for airing a series of TV commercials featuring a group of spandex-clad dancers.
But a series of scandals over heavy-handed debt collection and the conviction of Takei, who in 2004 received a three-year suspended sentence for ordering wiretaps on journalists who had criticised his company, marked the beginning of a crackdown by authorities on a business seen by some industry critics as little better than loan sharking.
Takei never witnessed the demise of his company's fortunes, having died in 2006. Forbes this year valued his widow's worth at $2.5 billion.
Takefuji may face repayment claims from as many as 2 million people, the Nikkei reported.
"We still haven't been able to confirm whether Takefuji is going to file for bankruptcy protection. But if that happens, it would be difficult to find a sponsor for Takefuji because we don't know how much overcharge it is going to be saddled with," said Junichi Shimizu, a credit analyst at Deutsche Securities. "I wonder if there would be anyone who would want to take that risk."
Japan's consumer finance squeeze culminated this year with a state-engineered credit crunch. In June the government capped interest rates at 20 percent, down from 29.2 percent, and limited the amount individuals can borrow to a third of their income.
Takefuji had 433.6 billion yen ($5.2 billion) in liabilities as of the end of June, research firm Tokyo Shoko Research said. Outstanding debt in bonds amounted to 134.9 billion yen, including 30 billion yen in straight bonds, 52.2 billion yen in U.S. dollar denominated global bonds, 42.4 billion yen in convertible bonds and 10 billion yen in euroyen bonds.
An analyst at a Japanese brokerage, who spoke on condition of anonymity, said he would not be surprised by Takefuji's failure, and was expecting a bankruptcy filing in April when the company has to refinance its straight bond. Takefuji's failure, he added, may even spur the government to relax its new lending rules, making it easier for the remaining consumer lenders to make money.
RATINGS CUT
Standard & Poor's Rating Services on Monday lowered its rating on Takefuji's long-term counterparty credit and senior unsecured debt a notch to CC from CCC-, defined as highly vulnerable or very speculative bonds.
"It is our view that the reports may raise the possibility of more customers filing additional claims for refunds of overcharged interest," S&P said in report. "The company's funding ability may be further constrained if business counterparties move to adopt a more cautious stance toward Takefuji," the rating agency added.
Acom is seen as the strongest financially among the top four consumer lenders, due in large part to its ties with Mitsubishi UFJ Financial Group, which has a 37 percent stake. Promise Co is about 20 percent owned by Sumitomo Mitsui Financial Group.
Aiful shares tumbled 22 percent and Acom fell 10 percent, while Promise dropped 11 percent.
Tougher credit rules and interest repayments have already claimed several victims. Credia became the first listed consumer finance firm to fold in 2007 while SFCG Co, a lender to small companies, failed in 2009 with more than $3 billion in debts.
Late last year, Aiful staved off bankruptcy by convincing its creditors to defer about 280 billion yen in bank loan principal payments, using a debt rescheduling procedure called "alternative dispute resolution", or ADR. ($1=84.18 Yen) (Additional reporting by Nathan Layne, Tim Kelly, Sachi Izumi, Chikafumi Hodo and Junko Fujita; Editing by Edwina Gibbs and Lincoln Feast)