- The Washington Times - Friday, January 17, 2003

TOKYO, Jan. 17 (UPI) — Japanese construction company Hazama is trying to get back on its feet, but can the latest plan save it from bankruptcy?

Hazama Corp., one of Japan's leading general construction contractors, said Friday that it will step up efforts to get back into shape by establishing a new company by spinning off its construction division, thereby separating its main operations from the loss-making real estate division.

"Continued land price declines and credit worries led by slumping stock prices" prompted the decision to restructure the company, said Hazama President Fumiya Yamato at a briefing announcing the decision.

The company head added that he plans to step down for failing to get the company's finance back on track.

Japan's biggest construction companies differ from their U.S. counterparts insofar as they are involved not only in the design and construction of projects, but they also act as real estate developers and engineers, all under the same group. During the soaring bubble economy, when every endeavor they undertook appeared to succeed, this one-stop shopping for developing resorts, high-rise buildings, and business districts was an efficient way of getting things built smoothly and quickly.

But the practice also meant that contractors have often bought up land prior to the collapse of the real estate market in anticipation of developing projects for a hefty profit, only to find that the plunge in land prices have left them deeply in the red.

Although real estate prices appear to have bottomed out, contractors often find it difficult not only to sell off the land that they had bought at a loss, but the real estate division has continued to drag down the profitability of contractors in general.

Meanwhile, contractors have suffered as a result of the steady decline in public spending, particularly under Prime Minister Junichiro Koizumi. Construction companies, particularly in rural Japan, have long depended on strong demand for public works paid for by taxpayers.

This has been the case particularly after the burst of the bubble economy in 1990, when capital spending in the private sector shrank or retreated to focus solely on the more urban areas.

While industry analysts are divided over just how effective Hazama's decision to separate its loss-making real estate practice from its construction division will be to get the company back on its feet, many expect rival firms to take similar steps.

Japanese financial institutions are under increasing pressure from the government to write off their non-performing loans, and contractors remain some of the biggest headaches for banks. At the same time, it is said that one in every ten Japanese worker is employed by a construction company, either directly or indirectly, and the political debate continues as to what the price should be to keep contractors afloat.

Still, financial markets welcomed the news, at least in the near-term, as Hazama shares soared 50 percent in trading on the Tokyo Stock Exchange Friday, ending up at 24 yen, which still remains decidedly weak.

Hazama has been facing more difficulties than other contractors over the past few years, and it had to obtain a debt waiver of $875 million in 2000 from its principal creditors, including Dai-Ichi Kangyo Bank, now part of the Mizuho Corporate Bank.

But even with the debt waiver, the company is still saddled with interest-bearing debts totaling $238.9 million, which though considerably lower than it had been in 2000 at $352.2 million, still remains high.

Under the latest restructuring scheme, Hazama will separate the real estate and construction division in October. The construction spin-off company will be capitalized at $83 million, and will list its shares separately from the old Hazama, the company said. Moreover, the new firm will have a debt-for-equity swap totaling $83 million, Hazama said.

Hazama will also be laying off 1,000 employees over the next three years, bringing down total staff to 1,950. By the fiscal year ending March 2006, the construction division company will be aiming to have sales of $1.65 billion and net profit of $60 million.

Meanwhile, the ailing real estate division will become its own company, and request financial aid from 64 financial institutions, including its main lender, Mizuho.

Local media reports suggest that the real estate arm of Hazama will be asking for more than $833 million to get rid of its loss-making assets. It will, however, have 51 percent of total shares in the spin-off construction company.





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