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Wednesday July 19, 3:53 PM Japan eyeing curbs on 'death spiral' finance TOKYO, July 19 (Reuters) - A possible move by Japanese regulators to restrict so-called "death spiral" corporate financing has drawn cheers from shareholder activists and objections from business groups and investment bankers. Death spiral financing, which involves the sale to investment banks of high-risk securities known as moving strike convertible bonds (MSCBs), can quickly deliver needed cash to an issuing firm at the expense of its share price. Although relatively new to Japan, MSCBs have soared in popularity even as their reputation has come under fire -- hurt in part by their association with scandal-hit Japanese Internet firm Livedoor, which used MSCBs to finance a takeover bid last year. "In most cases MSCB issuance doesn't benefit existing investors," said Tomomi Yano, executive director at the Pension Fund Association, a vocal advocate of corporate governance. "Japanese companies have a long history of not paying due regard to their shareholders, and the MSCB debate is a product of that history." At the request of the regulatory Financial Services Agency, the Japan Securities Dealers Association is mulling whether to adopt stricter rules on issuance of MSCBs. Yano and other activist shareholders want the association to require firms to obtain shareholder approval for any security issuance that could dilute existing investors' stakes by 20 percent or more. Unlike regular convertible bonds, which convert to shares at a fixed price, MSCBs convert at strike price that is periodically re-set to reflect moves in the share price. The strike price can be a discount, typically 10 percent, meaning the underwriting bank wins even if the shares fall. QUICK CASH Indeed, a falling share price can mean bigger profits for bankers, since the further the stock falls the more shares the bank receives. In some cases a spiral of declines and share issues ensues, sharply diluting existing shareholders' stakes. U.S. regulators clamped down on MSCB issuance after shark financiers drove dozens of small companies out of business by shorting their shares and intentionally triggering such spirals. "Companies have to thoroughly explain how issuing an MSCB would benefit existing shareholders, and if they can't do that they shouldn't be issuing the MSCB," Yano said. On the other side of the debate, however, companies are wary of restrictions on a financing method whose benefits can sometimes outweigh the risks. "Additional regulations aren't necessary, and would only narrow companies' options," said Yasuhisa Abe, a director at the Japan Business Federation, or Keidanren. Because underwriting banks need not worry about the downside of holding unwanted securities, MSCBs can be arranged in one or two weeks, and are often used by companies that need money quickly or have little prospect of raising large sums elsewhere. "Large-scale restructuring and M&A deals are becoming more common, so companies need fundraising tools that allow them to raise more money than they could through traditional channels," Abe said. NATURAL SHAKEOUT Japan's MSCB market has grown more than 40-fold since December 2003, when truck maker Isuzu Motors became the first big Japanese firm to issue such a bond, to a total of 1.25 trillion yen ($10.66 billion) from 154 issues last year. Lehman Brothers provided an 80 billion yen MSCB for Livedoor's takeover battle against Japan's biggest private broadcaster Fuji Television Network Inc. . The U.S. investment bank pocketed some 15 billion yen on the deal, market sources said, even as Livedoor's share price sank. Yasuhito Tominaga, deputy managing director of top brokerage Nomura Securities' Capital Solution Department, said the reputation of MSCBs would improve as companies begin to choose their underwriters more carefully. "Bankers whose deals end badly will be forced out of this business as a matter of course," he said. "No investment banker wants to see his client's share price fall after he's arranged an equity financing deal." Nomura, part of Nomura Holdings Inc. , has underwritten 26 MSCB issues this year worth a total of 635.2 billion yen, more than twice the amount for all of last year. For clients, the issues have compared favourably with straight share sales in terms of stock price performance and cost of capital, which averages around 10 percent, Tominaga said. He added that it is up to issuing companies to present a convincing "equity story" to their shareholders to justify the likely dilution. "Whatever financing method a company chooses, if it's not going to lead to an increase in shareholder value it's not going to be accepted." ($1=117.23 Yen)