Shinsei Bank Group’s collaborative strength— “We hope that Shinsei Bank will become the first bank that many small- and medium-sized enterprises ask for help whenever they need.”

Chairman and Representative Director, Koyo Electric Co., Ltd. Yoshihiro Yamamoto

Facilitator, Shinsei Bank, Tomonori Morita

Shinsei Trust & Banking, Shinya Yanase

Koyo Electric Co., Ltd. (hereinafter, “Koyo”) was founded in 1993 as an electrical engineering company. The company has now transformed itself into a producer and nationwide supplier of electricity. This all began when the Shinsei Bank Group arranged project financing for the company’s mega solar plants.
This dialogue with Mr. Yoshihiro Yamamoto, Chairman and Representative Director of Koyo, clearly illustrates one of the ways the Shinsei Bank Group supports new businesses of middle-market companies and small- and medium-sized enterprises (SMEs).

Question 1

What businesses does Koyo currently operate?

Yamamoto: We began as electrical engineering contractors for the construction industry, but subsequently tried to break away from merely being contractors. This was when we realized that we needed to change the way we did our business so that every employee would use their brains to the maximum to do their work and we started proposal-type businesses using our company’s energy saving services and cost- and energy-saving related technologies. This is the origin of our current business model.
While we obtained patents on machines related to energy management such as energy saving services and demand control, environmental awareness started spreading as the Kyoto Protocol took effect in 2005. The Great East Japan Earthquakes in 2011 also became a catalyst for the active promotion of renewable energy by the Japanese government which introduced the feed-in tariff system.
This trend increased the opportunities for us to receive construction orders for solar power facilities. But as we were aiming to expand our businesses and stabilize business management, we had a business vision of creating a structure where we would make our own power plants and “use clean energy wisely” and, to achieve this vision, we decided to start with geothermal power generation which seemed the best power source for stable energy supply.
Currently, the pillar of our businesses is the “Smart Energy Community.” In the Smart Energy Community, we manage and deliver to our customers electricity that is mainly generated by our power facilities, in particular solar power facilities, although we will also use electricity supplied by outside solar power producers (e.g., Independent Power Producers (IPPs)). Through this initiative, we plan to help people generally become wise consumers of cheap energy.

Chairman and Representative Director, Koyo Electric Co., Ltd. Yoshihiro Yamamoto

Chairman and Representative Director, Koyo Electric Co., Ltd.
Yoshihiro Yamamoto

Facilitator, Shinsei Bank, Tomonori Morita

Facilitator, Shinsei Bank
Tomonori Morita

Question 2

How did your relationship with Shinsei Bank start?

Yamamoto: Our relationship with Shinsei Bank started in 2012 when the Bank made a proposal on fundraising for our geothermal power generation business. During our discussions with Shinsei Bank, I said to them, “The development of geothermal power plants requires not only actual facilities but also coordination and harmonious relations with the local community. It is said that seeing is believing. Would you like to come along with us and have a look at the location?” To this, I immediately got a positive reply. So Shinsei Bank took part in interviews with local people, and through these, they came to correctly understand the details of our geothermal business and our approach to it. When we were discussing geothermal power generation, Shinsei Bank asked if we would be interested in the solar power generation business. This started serious discussions about solar power, and our company began placing first priority on solar power because its development period was shorter. We were mainly developing small solar power plants instead of mega solar. Then Shinsei Bank proposed that they would arrange project financing for a pool of two or more power plants, instead of raising funds separately for each power plant.

Morita: Back in 2012, we were only starting to seriously arrange project financing for solar power plants. We had just got internal loan approval for the first solar power plant project. For the first project and subsequent on-going projects, we looked into arranging financing adopting a scheme using a special purpose company (SPC). However, we proposed Koyo project financing based on the trust scheme with Shinsei Trust & Banking. A project financing scheme with a trust bank as the main business entity was trailblazing in Japan, and we thought it would be challenging for the Shinsei Bank Group as well.

Shinsei Trust & Banking, Shinya Yanase

Shinsei Trust & Banking
Shinya Yanase

Facilitator, Shinsei Bank, Tetsuya Hosoda

Facilitator, Shinsei Bank
Tetsuya Hosoda

Question 3

Why did you choose the trust scheme-based project financing method?

Yamamoto: Back then, many power producers leased the land for solar power plants. However, we decided to purchase the land so that we could own the facilities for a long time as our own power source. Shinsei Bank initially proposed corporate finance where we obtained a loan based on our credit standing. But later, they said that if we were to keep owning the land in the future, raising funds off balance sheet may reduce the impact of the debts on our stand-alone balance sheet and could enable us to more speedily develop our businesses. So we consulted with our independent auditors, and found out that off-balance treatment was possible for the accounting purpose. Then we started looking into project financing using the trust scheme.

Morita: Koyo was at the stage of venture business and did not have enough capital to become a sponsor of an SPC (for project financing). In addition, if Koyo was to finance a number of small solar power plants, putting all of them together in a pool and arranging finance for the entire pool would have the advantage of reducing the time and costs for arranging transactions. This is why we concluded that the scheme using a trust bank would suit Koyo better than the scheme using an SPC which we would have normally used for project financing. So we talked to Shinsei Trust & Banking, and introduced them to Koyo.

Yanase: This project financing with Koyo was the first transaction for Shinsei Trust & Banking to be entrusted with power plants. We had participated in the revenue trust deal for a publicly-operated waste disposal facility in Ibaraki Prefecture in 2011, and were entrusted with a hotel development project in 2012 as part of restoration efforts after the Great East Japan Earthquakes. We had always wanted to use trusts to make contributions to society. Even before this project came up, we had prepared ourselves so that we could create trusts at any time for power plants using renewable energy which was better for the natural environment. So it was great timing when Shinsei Bank approached us with this project, and we said we would love to do it.

Question 4

What were the difficulties and unexpected benefits of arranging financing?

Yamamoto: When we started arranging financing, we were made to work very hard. At the time, we were more like an SME than now, and we honestly thought, “Do we really have to do this much?” (Laughter) Shinsei Trust & Banking had this approach of rigorously analyzing risks in painstaking detail and clearing risks by placing risk mitigation measures for each one of them even if it was not a violation of laws or regulations and was commonly practiced. We were really astonished by their strong ethics concerning risks and laws.

Yanase: A big advantage of using the trust scheme is to gain a high level of confidence from outsiders who see this solar power plant as a business that has passed a screening test by a trust bank. In addition, investors seem to consider that the trust scheme eliminates sponsor risk better than the SPC scheme from the practical viewpoint of bankruptcy remoteness. Shinsei Trust & Banking has criteria on whether or not to accept properties in its trusts from the viewpoint of compliance with laws and regulations and investor protection. Because of these, we have to address minor details that you may be able to overlook for your own properties. So we caused great trouble to Koyo, who had to deal with practical issues. However, because Koyo responded sincerely to each request we made, we were able to make a project financing scheme which would legally protect the rights of concerned parties if things go wrong. It was a very difficult transaction as many issues arose that we hadn’t expected at the beginning of the transaction. We are very grateful that Koyo did not give up on it and dealt with us sincerely.

Yamamoto: By learning the perspective of Shinsei Trust & Banking, we have learned a great deal about how we can make a project more attractive to financiers, including what terms and conditions we should include in contracts concerning land, and we are now able to see some invisible pitfalls to a certain degree. Given our financial fundamentals, if we had obtained a corporate loan to raise funds, we wouldn’t have been able to go beyond the first project. Having completed one trust scheme, however, we feel we can use this for subsequent projects and we can see the possibility of the second and third projects. We really feel fortunate that we came to know Shinsei Bank. I think this scheme was the only option for us. We are very grateful that Shinsei Bank patiently spent two years with us to complete a deal.

Question 5

In what way did different sections in the Shinsei Bank Group cooperate with each other?

Morita: The key point of this project was close cooperation among Shinsei Bank’s project finance team, Shinsei Trust & Banking, and Shinsei Bank’s Osaka Branch. The project finance team and Shinsei Trust & Banking were located in Tokyo, while Koyo was headquartered in Kobe. This means there was a physical distance. This was where the Osaka Branch came in. They were in touch with Koyo on a daily basis asking about their business situation and the progress in their solar power generation business and sharing such information with the project finance team to ensure seamless team work as the Shinsei Bank Group.

Hosoda: In this project, we had considered granting a corporate loan to finance bridging funds as the run-up to project financing. We, the institutional business team, shared information we obtained with other sections of Shinsei Bank so that we could successfully arrange both the bridging fund loan and project financing. Even after the financing was arranged, we have allocated roles and cooperated with each other. For instance, the Project Finance Department (currently, Project Finance Division) monitors the project, while we monitor corporate credit.

Yanase: The Shinsei Bank Group is relatively small compared to other banks. We have highly-experienced staff with diverse functions in an organization of a size that allows us to get to know everyone by face. As in this project, we would like to create many projects which are tailored to our customers’ needs and for which we can work together well as the Shinsei Bank Group.

Question 6

What are your future plans?

Yamamoto: We have already started looking into the second and third solar power plant projects. In addition, we would like to seriously tackle geothermal power generation, although we are aware that its hurdles are even higher than solar power. Our strength is that we have staff members who are capable of exploring underground resources and setting up power generators. Furthermore, the scheduled liberalization of the power retailing market in 2016 provides great business opportunities for venture companies like us to develop local-production, local-consumption energy and to create the Smart Energy Community in regional areas. We need to anchor our power generation business deeper into regional communities in the future. On the other hand, raising funds from outside sources is essential for venture companies to develop their businesses. This means that financial institutions have a great role to play.

Hosoda: With regard to renewable energy, Shinsei Bank has so far mainly arranged project financing for solar power plants, but has already started arranging financing for other power sources such as wind and biomass power. We are highly interested in geothermal power and are studying it. We would love to throw ideas at each other and create a project together like we did for the solar power plant project.

Morita: To uphold the concept of venture banking initiatives, we think we should become a bank that works on creating new financing structures with the spirit of venture companies. Like project financing for solar power generation business, we would like to create structures to support the accelerating growth of our customers in general businesses as well by appropriately evaluating cash flow generated from their businesses and designing cash flow finance. To turn these structures into reality, we aim to maximize cooperation within the Shinsei Bank Group by, for instance, using the trust scheme offered by Shinsei Trust & Banking as one of the solutions and working together with Branches that have daily communication with local customers and analyze local companies. Our first priority is to complete solar power projects well. Then, we hope to work on geothermal and hydraulic power generation in order to contribute to the development of the renewable energy businesses. Furthermore, we would like to contribute to energy policies for the entire country.

Yamamoto: When we were working on the first project, our sales were in the range of about 2 billion yen. Our sales have now increased many times over that amount, and we are proud to say that we have created a reasonably strong position in the energy industry although we are an SME in terms of our size. Without the success of this project, we wouldn’t have grown this much. We hope that the Shinsei Bank Group will become the first financial institution that many SMEs will go to ask for help when they need.

(MAY 2015)