Vying with Wall Street giants and "vulture funds" in a speculative market, an upstart Orange County group has agreed to buy $1.7 billion in bad Japanese loans for a fraction of their face value.
Pacific Capital Investors, which includes former American Savings & Loan chief William J. Popejoy, struck the deal after months of negotiations with Bank of Tokyo-Mitsubishi, the world's biggest bank.
"They're trying to expand the sale of nonperforming assets, but also to be a pioneer of doing things in a more Japanese way," said Popejoy, Pacific Capital's president.
The purchase of the first $370 million in defaulted and foreclosed loans was completed this week, using funds from Popejoy and his partners as well as their acquaintances. The company hopes to attract money from the giant California Public Employees Retirement System and other state pension and endowment funds for subsequent deals.
Popejoy's partners in the investment company include Michael Ray of the Irvine development firm Sanderson-J. Ray Corp., who is founder and chairman of Pacific Capital, and Michael L. Meyer, the retired managing partner of the Orange County office of E&Y Kenneth Leventhal, a Los Angeles accounting firm that specializes in real estate.
The loan sale, one of a series by Japanese banks, stems from the collapse of the 1980s "bubble economy" of soaring Japanese real estate and stock prices spurred by a booming economy, high liquidity and low interest rates. During this decade, the economy slowed and property values plunged, with offices and apartments typically worth just 50% or 60% of their peak prices. The banks finally are facing up to regulatory pressures to deal with defaulted and foreclosed loans that some say could total $1 trillion.
Some experts believe the market remains overpriced. "There's still a lot of downward pressure," said John Tofflemire, general manager of the Tokyo office of CB Richard Ellis, a commercial real estate brokerage. "The reason prices keep falling is that it's not worth it."
Years of decline have attracted Western opportunists ranging from investment banks to General Motors' financial arm to bottom-fishing funds like Los Angeles' Colony Capital and New York's Apollo Real Estate.
West Los Angeles-based Oakwood Apartments has even been buying foreclosed apartments to rent to expatriate Americans, said Jack Rodman, director of Asian real estate at E&Y Kenneth Leventhal, a Los Angeles accounting firm that specializes in real estate.
Lured by a chance to buy soured loans and foreclosed property for a few cents on the dollar, the investors compare their prospects to the private fortunes made when the U.S. government liquidated the holdings of savings and loans that failed in the 1980s.
Last year, foreign investors bought $44 billion in "nonperforming assets" from Japanese banks. This year, they've already purchased $20 billion, Rodman said.
As the market broadens, the deals aren't quite as cheap. Rodman said investors were paying 3 to 5 cents per dollar of face value in 1997, 8 to 12 cents last year and 10 to 15 cents this year.
Most of the previous deals have involved competitive bidding. But Rodman said negotiated deals such as Pacific Capital's have become more common this year as banks rushed to purge bad loans by March 31, the deadline to qualify for tens of billions of dollars in government bailout funds.
Popejoy, a Newport Beach millionaire who was the chief executive of Orange County after its 1994 bankruptcy and later nursed the California Lottery out of its difficulties, is an expert in managing and selling bad property loans. He was installed by federal regulators to head Irvine-based American Savings in the 1980s in an attempt to avert the biggest failure of the S&L debacle. American failed anyway at a cost to taxpayers of $5.4 billion, but Popejoy's reputation emerged largely unscathed.
The loans purchased by Pacific Capital are not on so-called trophy buildings, but on grade "B" and "C" properties, including offices, shops, apartments and others. The first $370 million in loans involves 34 borrowers and 187 loans with 66 pieces of collateral, Ray said.
Pacific Capital agreed not to disclose how much it paid for the loans. The company hopes to make money by working out deals for partial repayment and will repossess property only as a last resort.
Popejoy said the company had factored in the possibility that property values could continue to fall for another year in Japan, and that he and his partners can still profit if that occurs.
Pacific Capital wiggled its way into the deal by hiring Japanese advisors and "basically immersed ourselves in Japan over the last six months," Ray said. "Instead of pretending to know it all, we'd say, 'I'm confused. I don't understand.' And whenever we said that, the Bank of Tokyo-Mitsubishi said we'll help you."
In a deal worked out with senior bank executives, the Orange County group promised to bring in money from investors not already operating in Japan. They also agreed to engage in the lengthy consensus-building talks that characterize Japanese business relationships and to use Bank of Tokyo subsidiary Nippon Trust Bank to help liquidate the loans. Many buyers instead have used American firms to handle their loan negotiations and foreclosures.
Nippon Trust will first try to arrange for borrowers to repay loans at a large discount or refinance them, or as an alternative have friends buy the property--with a piece of the profits going to the original borrower. With interest rates near zero, Japan has a huge "mattress economy" of ready cash reserves, making such deals relatively easy to do, Ray and Popejoy said.