As more foreign financiers increase their involvement in leveraged finance in Japan, the market practices and terms they bring with them are shaking up the country's traditionally conservative lending landscape.
Among the foreigners making a splash in Japan are BNP Paribas and KKR Capital Markets. The French bank is the sole lender of a ¥16.17bn (US$105m) seven-year term loan to back private equity firm EQT’s planned leveraged buyout of Tokyo-listed information technology company Mamezo.
KKR Capital Markets is arranging debt of an undisclosed size, together with two undisclosed financial institutions, for KKR’s counterbid for cosmetics company Mandom’s management buyout. The borrowing is said to carry covenants that are relatively loose by the standards of the Japanese market, similar to the structure on a ¥32.31bn loan late last year from Bank of Yokohama and KKR Capital Markets supporting KKR’s LBO of Tokyo-listed engineering staffing agency Forum Engineering.
However, loose structures are unlikely to spread widely in Japan, where leveraged financing activity remains the stronghold of the three megabanks – Mizuho Bank, MUFG and Sumitomo Mitsui Banking Corp – and their smaller rivals.
The moves by foreign lenders are unsettling domestic banks nonetheless.
“We feel a growing sense of alarm as new rivals enter the market and global terms are increasingly imported into Japan,” said a senior LBO banker at a Japanese bank. “Covenants are not universally required, and they are fundamentally tailored on a deal-by-deal basis. However, it becomes problematic when covenants that ought to be in place are missing.”
High leverage multiples
This might seem counterintuitive given Japan is notorious for wafer-thin pricing on plain-vanilla loans due to abundant liquidity among domestic lenders. Leveraged loans there are more borrower-friendly than in other parts of the world in at least one respect – gearing multiples.
Last year, BNP also underwrote – alongside four other Japanese lenders, including two megabanks – a ¥205bn loan backing EQT’s LBO of elevator maker Fujitec. This financing carries leverage of 9.8x based on the target’s Ebitda of ¥20.88bn.
The headline leverage multiple for Mandom MBO financing is around 11x, while that for Forum Engineering is 7x based on the ¥5.29bn and ¥4.61bn in Ebitda the two companies generated respectively for the year ended March 31 2025. BNP’s ¥16.17bn loan for Mamezo’s LBO represents a gearing of 7.5x based on Ebitda of ¥2.15bn.
Such high leverage multiples will not pass muster in other parts of Asia, where LBO loans typically come with gearing of around 4.5x or lower to meet the requirements of conservative lenders in the region's bank-dominated market.
On the other hand, Japanese LBO loans carry tighter terms such as maintenance covenants that are tested regularly and require borrowers to maintain or achieve certain financial metrics.
Leveraged finance players in Japan are more conservative than their counterparts elsewhere and are reluctant to consider covenant-lite or looser structures that are common in Europe and the US.
“LBO financing in Japan has developed somewhat differently from that in Europe and the US,” said Toru Shimizu, managing director of the strategic finance department at Mizuho. “On the other hand, foreign banks operate globally, so they sometimes bring overseas terms and practices into Japan. We are currently considering how to reconcile these differences.”
The dominance of banks in the leveraged finance market in Japan leaves little scope for institutional products such as term loan B and unitranche financings that carry covenant-lite or looser structures.
Domestic lenders are therefore paying close attention to the BNP and KKR Capital Markets deals.
Will cov-lite take hold in Japan?
Despite the looser covenants on the loan for Forum Engineering’s LBO, KKR Capital Markets has already sold down its entire ¥16.16bn position to Kiraboshi Bank and SBI Shinsei Bank. The loan is considered to be the first major instance of private credit playing a central role in a Japanese LBO.
“There is talk that a cov-lite environment could take hold, but the key question is who the main arrangers and final net takers are in the Japanese financing market?” said Takashi Manabe, head of sponsors finance group in SMBC’s strategic corporate banking department.
Top-tier Japanese lenders, including the megabanks, generally refrain from adopting global structures that come with looser terms. As a result, even when a foreign lender is among the MLAs, the structures tend to have tighter covenants. In contrast, deals that do not involve megabanks tend to feature looser covenant packages.
While international PE firms have been prolific in Japan with LBOs – some are even involved in bidding wars – opportunities for private credit financiers have been few and far between.
“[The] private debt market should be growing in an environment where it complements bank-arranged deals – either by providing quantitative support or by taking on deal types that banks find difficult to handle,” said Jin Nishikawa, head of M&A finance at MUFG. “If the trend becomes excessive, it could distort the market.”
The debt KKR Capital Markets is providing for Mandom’s MBO will only see the light of day if KKR trumps CVC Capital Partners in the race to acquire the cosmetics company. KKR Capital Markets is expected to sell down the loan.
Meanwhile, MUFG’s syndication strategy for the ¥60bn financing it has underwritten for Mandom’s MBO is not known. Last November, the megabank increased the underwritten loan from an original size of ¥53bn to back CVC’s sweetened bid for Mandom.
Spokespersons for BNP and KKR Capital Markets had not responded to requests for comment at the time of going to press.