Japanese consumer lender Orient secured a $2.5 billion rescue package from Mizuho Financial Group, Morgan Stanley and others on Wednesday after a legal crackdown on the consumer credit industry sent the company into financial trouble.
Orient, which expects to post a $4 billion loss this year, said it would issue 185 billion yen ($1.6 billion) of non-voting preferred shares to Mizuho, which is Japan's second-biggest bank and Orient's biggest creditor.
Morgan Stanley, U.S. private equity firm Kohlberg Kravis Roberts, trading house Itochu and the Development Bank of Japan will provide the remainder of the 290 billion yen ($2.47 billion) bailout.
Orient said earlier this month it expected its annual net loss to balloon to 458 billion yen ($3.9 billion) as it repays borrowers for interest charges deemed by courts to be illegally high.
Other Japanese consumer credit firms have also fallen deep into the red this year, forcing them to cut jobs, shrink their branch networks and in some cases seek financial help.
Orient's bailout "suggests a glimpse of what's to come," said Timothy Marrable, an analyst at KBC Securities. "Bailout deals would make the stocks more attractive," he said, though he added some consumer lenders could have trouble finding outside sponsors given uncertainty over the true scale of their problems.
Orient's troubles have hurt both Mizuho and Itochu, which is Orient's top shareholder with a 21% stake.
The trading company plans to book a 41 billion yen special loss due to its affiliate's financial decline, though it has not changed its overall earnings forecasts thanks to a sharper-than-expected rise in resource-trading profits. Itochu will put up 30 billion yen of the Orient rescue package.
Mizuho cut its annual profit forecast by a quarter to $4.6 billion last week. The bank has more than $2 billion in loans outstanding to Orient, and the company's troubles have forced it to downgrade the debt and boost reserves against potential default.
Mizuho's corporate and retail banking arms together own 6% of Orient's voting stock as well as hundreds of billions of yen of preferred shares. Mizuho will provide 140 billion yen in new equity capital though a debt-equity swap and another 45 billion yen through a third-party allocation of new preferred shares.
The shares issued in the debt-equity swap will be convertible to common stock after 10 years, but Orient said it plans to buy them back before that. The rest of the new shares will be convertible after three and a half years.
Excluding the shares exchanged for debt, Mizuho would end up owning a 28.5% voting stake in Orient if it converted all its preferred shares in the company, while Itochu could eventually raise its stake to 22.6%.
In a separate deal, Itochu agreed to buy a 10 percent stake in UC Card, a credit card issuer that is part of the Mizuho group. The companies said they hoped to build an operating alliance in retail finance.
Morgan Stanley and KKR are funding the Orient bailout as straight investors. Morgan will buy 35 billion yen of new Orient shares, the second most after Mizuho, and KKR will buy 20 billion.