Distressed Japan Hotel Chain Unizo Sparks Hedge Fund Battle

(Bloomberg) -- Distressed Japanese hotel operator Unizo Holdings Co. is back at the center of a tussle between financial market heavyweights, after a Hong Kong-based hedge fund flagged risks to creditors.

What’s happening:

Unizo has been attracting more scrutiny as its debt falls deeper into distress. The company was delisted in June after a management buyout financed by U.S. private equity firm Lone Star through an entity called Chitocea Investment.

Last week, Hong Kong-based Asia Research & Capital Management said in a letter sent to Unizo, Chitocea and Lone Star seen by Bloomberg News that it held 4.7 billion yen ($44.5 million) at face value of Unizo bonds and had reason to consider that the hotel firm is likely insolvent.

ARCM requested in the letter dated Feb. 8 that it be provided with details within 7 days on:

• Whether Chitocea had the capacity to repay a 216 billion yen loan to the hotel chain
• Whether Lone Star had given any binding assurances of financial support for Chitocea to repay the loan

According to a financial statement in December, Unizo had lent Chitocea 216 billion yen as short term lending.

ARCM said through the public relations firm representing it that it had sent a letter, while declining to comment further. Unizo declined to comment, as did a spokesperson for Lone Star.

Unizo has 99 billion yen in local bonds outstanding, with one note maturing in May, and interest payments on several other debt securities due in the same month. Some of its bonds are indicated at about 22 yen compared with an issue price of 100 yen.

What’s the background:

Unizo was the target of an acquisition fight in Japan between 2019 and 2020 that pitted global private equity giant Blackstone Group Inc. against Lone Star and SoftBank Group Corp.’s Fortress Investment Group LLC.

Lone Star in partnership with Unizo employees forming the Chitocea entity won out last year, with the U.S. firm providing financing for the buyout.

But then as the pandemic worsened, dragging down business in the hospitality industry, Unizo’s problems grew.

It’s asked financial institutions including many Japanese regional banks to refinance 20 billion yen of loans by May this year, according to company documents submitted to lenders in December and seen by Bloomberg News.

Why it matters:

Many of the small Japanese financial institutions such as the regional banks and credit unions that are creditors to Unizo are already struggling amid the pandemic.

Such lenders have for years grappled with dwindling local populations and operate on small profit margins due to decades of low interest rates in Japan, and those stresses are being compounded by the Covid-19 crisis.

At least one local regional bank has already reflected the drop in the market value of its Unizo debt holdings. Bank of Kochi has written down the value of its Unizo bond, according to a spokesperson.

What do rating companies say:

Unizo was cut to junk by Japan Credit Rating Agency in late December, a stark end to a year it started as a hot takeover target for global investing giants.

The Japanese firm’s credit score was downgraded to BB+ from BBB- by JCR, which cited deterioration in its financial structure and cash-flow generation ability due in part to the pandemic. That made the company a rare borrower in Japan that has both a speculative-grade local rating and bonds outstanding.

The move came just a week after JCR had cut Unizo’s rating to BBB-. At that time, the rating assessor said that Unizo effectively bears the burden of repayment and redemption of the funds that were externally raised by Chitocea for the tender offer.

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