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Structuring a lending transaction

General

Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

Generally, secured financing in Japan is provided by domestic and international banks, as well as by other financial institutions which are legally allowed to conduct lending.

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

There is no well-established market-standard facility documentation for secured lending transactions in Japan. If the secured loan is a syndicated loan and is solely a national transaction, it is common to use a form of syndicated loan agreement (not a secured loan agreement) published by the Japan Syndication and Loan Trading Association by modifying it as necessary.

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Yes, syndicated secured loan arrangements are common in Japan, especially for project financing.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

Generally, one of the lenders under the loan agreement (usually the bank arranging the transaction) is appointed as an administration agent for all lenders under the agreement.  The administration agent is usually responsible for:

  • communication between the borrower and lenders (including receiving reports or notices from the borrower);
  • receiving payments from the borrower and distributing these to the lenders; and
  • clarifying the intention of the majority or all lenders when necessary.

In a secured loan transaction, a collateral agent is also appointed who is usually responsible for:

  • communication between the security provider and lenders with regard to the collateral;
  • administrative procedures for the establishment, transfer and termination of the security interest; and
  • distributing the amount collected in connection with the security interest without the court’s involvement.

The Lawyers Act and the Act on Special Measures Concerning Claim Management and Collection Businesses generally prohibit any person other than a lawyer or a legal professional corporation from conducting legal services concerning a legal case for profit. Provisions concerning an administration agent and a collateral agent under the loan agreement and any other agreement related to the security interest should be set out in a way that conforms with these acts.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

Under the Trust Law, the security interest can be held on trust by a trustee for the benefit of the banking syndicate. However, the law does not allow a trustee to be a guarantee for the benefit of the banking syndicate. Thus far, there have not been many cases where security trusts have been used by banking syndicates.

Special purpose vehicle financing

Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

Using an SPV is uncommon in typical corporate finance transactions. However, SPVs are often used as borrowers in order to have the SPV hold the assets subject to securitisation or liquidation in structured or project finance transactions. In such cases, a lender generally requires the SPV to provide its shares as collateral and to provide direct asset security such as a mortgage or pledge over the SPV’s assets.  

Interest

Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

Interest is usually calculated based on market standard variable reference rates. In domestic transactions, the Tokyo Interbank Offered Rate (TIBOR), formerly published by the Japan Bankers’ Association (JBA), is often used, especially by so-called ‘mega banks’ or other larger banks. Following the LIBOR scandal, the JBA no longer publishes TIBOR; instead, this role has been taken by a third-party non-profit organisation established solely for this purpose (ie, the General Incorporated Association JBA TIBOR Administration). In international transactions, LIBOR is usually used.

Under the existing situation where the Bank of Japan maintains a negative interest rate policy, the JPY LIBOR now regularly becomes negative and TIBOR may become so as well. In order to deal with this situation and for banks to avoid paying interest to borrowers, many Japanese banks now adopt the TIBOR/LIBOR plus margin with zero floor, meaning that if the interest rate obtained by referring to the published TIBOR/LIBOR adjusted by the margin rate turns to be negative, the applicable interest rate will be zero instead. Some banks also adopt TIBOR/LIBOR with zero floor plus margin; therefore the lowest applicable rate will be the margin rate.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

The Interest Rate Restriction Act stipulates that the maximum interest rate chargeable on a loans varies depending on the principal amount of the loan, whether by banks or otherwise. Under the act, although the maximum rate itself is rather high (eg, 15% per annum if the principal amount is ¥1 million or more), any amounts received by the lender in connection with the loan from the borrower will be deemed ‘interest’. Accordingly, the total costs may exceed the limitation under the act, especially in the case of structured or project finance transactions where various fees will be involved with the financing.  Some statutory exemptions apply to certain types of credit facility agreement, where the maximum interest rate regulation under the act will not apply.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Guarantees are generally used for loans to companies. In particular, operators of small or medium-sized enterprises often become joint and several guarantors for a loan made to such operator’s company.  Parent companies also generally provide guarantees for loans made to their subsidiaries. In case of loans made to a so-called ‘holding company’, there are also cases where the operating company, which is a subsidiary of such a holding company, provides guarantees for such a loan. Further, upstream guarantees are valid under Japanese law.

What is the procedure for their creation?

Guarantees are created when a guarantor and a lender execute a guarantee contract. Under the Civil Code, a guarantee contract will be invalid unless it is executed in writing (Article 446(2)). The ‘contract for revolving guarantee on loans’ defined in Article 465-2(1) of the Civil Code will become null and void if the maximum amount is not provided in such contract (please see our answer to the next question).

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

Guarantee obligations are established when the principal obligation is established and extinguished when the principal obligation is extinguished. If the burden of a guarantee obligation is more onerous than the burden of principal obligation, the burden of guarantee obligation will be reduced to the limit of the principal obligation (Article 448 of the Civil Code).

A guarantee contract will not be valid unless it is executed in writing (Article 446(2) of the Civil Code).

Article 465-2(1) of the Civil Code specifies that a ‘contract for a revolving guarantee on loans’ has special restrictions and defines it as a guarantee contract in which one or more unidentified obligations within a certain specified scope is the principal obligation. It must include a loan obligation (ie, an obligation which is incurred as a result of the transaction of lending money or accepting the discount of a negotiable instrument) within the scope of a guaranteed obligation and the guarantor must be an individual. 

A contract for a revolving guarantee on loans will not become effective unless the maximum amount is stipulated (Article 465-2(2) of the Civil Code). With respect to a contract for a revolving guarantee on loans, in the event that the determination date of the principal obligation under the contract for revolving guarantee on loans arrives or the grounds for determination of principal of principal obligation under the contract for revolving guarantee on loans arise, a guarantor will thereafter assume the guarantee obligation only on the determined principal and its interests and late payment charges. The principal determination date must be within five years of the contract’s execution date. Grounds for principal determination include:

  • where a petition for compulsory execution or for exercise of any security interest against relevant principal obligor or guarantor is filed;
  • where the relevant principal obligor or guarantor has become subject to a ruling to commence bankruptcy proceedings; or
  • where the relevant principal obligor or guarantor has died.

Pursuant to the amended Civil Code, which is scheduled to come into force by June 2020, the provisions on guarantees will also be amended and the regulations on guarantees by individuals will be strengthened. Under the amended code, a contract for a revolving guarantee made by individuals (ie, a guarantee contract in which one or more unidentified obligations within a certain specified scope is the principal obligation and in which a guarantor is not a juridical entity) which fails to stipulate a maximum amount will be null and void (Article 465-2 of the Civil Code). With respect to guarantee contracts in which a loan obligation assumed for a business is the principal obligation or contracts for revolving guarantees which include a loan assumed for business within the scope of principal obligation, where the guarantor is an individual the contract will not become effective unless he or she manifests his or her intention to perform the guarantee through a notarised deed (Article 465-6 of the Civil Code). However, if the individual is a relevant party (eg, a director, officer or controlling shareholder) of the relevant obligor which is a legal entity, he or she is not required to manifest his or her intention to perform the guarantee through a notarised deed (Article 465-9).

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

There is a method in which a contract is executed between creditors and debtor to agree on the priority of repayment, but the execution of such contracts is uncommon unless the loan is made to a special purpose vehicle. In many cases, a loan is secured by the mortgage of land or a building. Such a mortgage has a set order of priority, with sale proceeds from foreclosure paid first to senior mortgagees with secured claims. It is possible to assign or change the priority rank of mortgage.

Documentary taxes and stamp duty

Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

Stamp duty of between ¥200 and ¥600,000 is imposed on loan contracts depending on the contract amount if the contract amount is ¥10,000 or more.

Stamp duty of ¥200 is imposed on debt guarantee contracts.

No stamp duty is imposed on contracts which create or assign mortgages or contracts concluded on the creation or assignment of a pledge. However, in cases where the contract for the creation of a mortgage includes a provision in which a mortgagor agrees to assign to the mortgagee a claim relating to collateral (ie, mortgaged land or building) – for instance, compensation for the expropriation of mortgaged land – stamp duty of ¥200 is imposed.

Although no stamp duty is imposed on mortgage foreclosure or the enforcement of pledge, it is necessary to pay registration licence tax to register an attachment (if registration is required), as well as a deposit and filing fee to the court.

If the relevant documents are executed outside of Japan, no stamp duty will be imposed even if the rights under such documents are exercised in Japan or such documents are stored in Japan.

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